On June 24, 2021, a 12-story beachfront condominium building in Surfside, Florida, partially collapsed. The collapse resulted in the deaths of 98 people and is considered one of the deadliest building collapses in the history of the United States.
In the following months, a number of investigations were launched to determine the cause of the collapse. A combination of factors were found including design/construction deficiencies, building deterioration, and insufficient maintenance/repairs.
The tragedy raised concerns about the safety of other buildings, leading to calls for increased inspections and regulations. In response, The Federal National Mortgage Association (FNMA, otherwise known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, commonly known as Freddie Mac) both created new sets of requirements impacting condominium associations. These new guidelines address several factors including:
- Significant deferred maintenance and unsafe conditions
- Special assessments
- Reserve requirements
- Project eligibility waivers
- Documentation (ex. engineering reports, inspection reports, condo questionnaires, HOA meeting minutes)
Fannie Mae maintains a list of “unavailable” properties that have issues involving environmental hazards, title issues, structural problems, or other issues that would affect the safety, soundness, or marketability of the property. Properties on the unavailable list are ineligible for Fannie Mae financing and lending.
Since the unavailable list is not public, recent news outlets have reported that over 1400 community associations across the United States are abruptly finding themselves on the unavailable list.
How does this Impact Community Associations?
Fannie Mae is one of the largest purchasers of mortgage loans in the United States and many lenders rely on Fannie Mae’s eligibility requirements when underwriting and approving loans.
Being on Fannie Mae’s unavailable list may limit the ability of association unit owners to obtain financing for their condos and/or houses. It can also result in a decline in property values and may make it difficult for the association to attract new buyers or maintain existing owners. A few scenarios include:
- Current association unit owners attempting to refinance their existing mortgage may be unable to take advantage of affordable lending rates.
- Refinancing utilizing a Fannie Mae mortgage loan may be delayed due to review or the need to find alternative lending if the loan is rejected.
- Association unit owners may see decreased property values due to the association’s noncompliance with Fannie Mae and Freddie Mac guidelines.
- Refinancing utilizing a Fannie Mae mortgage loan may be delayed due to review or the need to find alternative lending.
- New buyers into the association may be unable to utilize conventional mortgage financing options, potentially limiting unit sales within the association.
- New buyers may need to seek alternative mortgage options, limiting potential purchasers who cannot utilize cheaper lending rates and easier to qualify lending products.
- New buyers may need to put down higher down payments, potentially limiting unit sales within the association.
- Unit closings utilizing a Fannie Mae mortgage loan may be delayed due to review or the need to find alternative lending.
Alongside marketability and value, being on the unavailable list may also limit the community association’s ability to obtain financing for repairs or improvements that can impact the overall maintenance and condition of the property.
Next Steps for Board Member and Property Managers
Board members are volunteers, not experts. They will certainly be unaware of revised and constantly evolving legal requirements impacting their communities. Nevertheless, board members have a duty to maintain and improve property values within their condominium, homeowner (HOA), and townhome associations.
Board members and property managers must pre-emptively plan and deal with repair and safety issues. Fears of increasing assessments or levying special assessments can lead to underfunded reserves. Deferred maintenance can discourage sales. Ignoring the warning signs and poor planning can create a costly crisis. In addition, ignoring these new guidelines can turn away potential buyers who would otherwise be eligible for a loan.
Here are six proactive best practices to consider:
1. Create a maintenance responsibility chart – This is designed to be a quick reference guide that contains an overview of unit owner and association maintenance responsibilities. The chart is specific to the community and may address items such as HVAC, landscaping, pest control, snow removal, fencing, and balconies.
2. Organize association documents – Scattered, misplaced, and outdated documents can lead to poor decision-making and inefficiency. Organized documents provide board members with a clear understanding of the association’s financial and administrative matters. It will also assist associations in maintaining legal compliance with local, state, and federal laws and regulations.
3. Evaluate the association’s budget – A thriving community starts with a thoughtfully prepared budget. Generally, a budget should include the association’s estimated annual revenue, expenses, and reserve fund contributions. Reviewing past budgets may assist in forecasting upcoming expenses and funding gaps.
4. Review the association’s reserves – Along with upcoming expenses and projects, the budget should also address the association’s reserves. Adequate reserve funding can be integral in the event of an emergency or unexpected costs. An underfunded reserve account can also be a red flag for potential buyers and mortgage lenders.
5. Prepare for document requests – Buyers are entitled to receive certain disclosures from the seller or developer before purchasing a unit. These disclosures typically include information about the financial health of the association, any pending legal actions or disputes, and any defects or deficiencies in the common elements of the property. Board members should work with their management, financial consultants (ex. accountant, reserve specialist), and legal counsel to compile and confirm information for real estate sales and refinancing transactions.
6. Assess your community’s assessments – The cost for utilities, maintenance, contractor services, and other association resources continue to increase. Board members should regularly reevaluate their community’s assessment levels to make sure they are adequate and utilize their association’s collection policy to address any delinquencies.
Do not hesitate to contact our law firm if your association has questions regarding these new condominium requirements, the board’s fiduciary duties, building codes, reserves, document retention, litigation, or other legal concerns.
Please call 855-537-0500 or visit www.ksnlaw.com.
Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collections, landlord/tenant issues, and property tax appeals. We have four office locations, serving hundreds of clients and thousands of communities throughout Illinois, Indiana, and Wisconsin. Our attorneys are also licensed in Arizona, Florida, and Texas.
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