“New Federal Mortgage Requirements: Impact on Community Associations” – KSN attorney Matthew Moodhe discusses how new federal mortgage requirements will impact community associations. Matt reviews the 2022 Fannie Mae and Freddie Mac regulations, seller disclosures, reserve funding requirements, and more.(15 mins.)
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Episode Transcription
Bernie: You’re listening to the KSN podcast and today we’re talking about new federal mortgage requirements and their impact on your community association. Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, landlord tenant law, and more. I’m Bernie and today we’re joined by KSN attorney, Matt Moodhe. Matt practices association law, and has represented condominium, townhome and homeowner communities for over 25 years. Matt, welcome to the podcast.
Matt: Thanks Bernie. I appreciate it.
Bernie: So, our topic today revolves around the new federal mortgage requirements and their impact on community associations. In June, 2021, there was a tragic condo collapse in Surfside, Florida that has motivated many within the community association industry to reevaluate their priorities, especially as it relates to older high-rise condo buildings. And if an association has been downplaying the need for maintenance to keep costs, let’s say artificially low, safety concerns are critical, but they may now represent only a part of the motivation to change, postponing necessary repairs or only partially addressing damage are factors that can stagnant communities’ market value. And in response to that, the federal national mortgage association, otherwise known as Fannie Mae and its sister agency, Freddie Mac had both approved that new set of guidelines. So, Matt let’s give listeners some context regarding the impact of those new federal requirements on associations.
Matt: Practical impact of these new regulations is very significant. Let me just talk briefly about the role that Freddie Mac and Fannie Mae play in the purchase process of a condominium unit. Freddie Mac and Fannie Mae are a little different than FHA. They don’t issue mortgages per se. What they do is they insure mortgages that are issued by your conventional lender. So naturally federal agencies want to make sure that the properties that act as collateral for these loans are well maintained and structurally sound and financially sound and as you indicated, the tragedy that took place in Florida last year really opened a lot of eyes. The condominium association phenomenon, if you will, has been around for 50, 60, 70 years and a lot of these buildings are getting older and older and some associations and their boards have not been as proactive and those were some of the causes apparently of this collapse.
So, at the end of last year, toward the end of last year, Fannie Mae and Freddie Mac issued some new requirements in the form of a disclosure in questionnaire that has to be filled out in the event that a prospective purchaser is seeking a mortgage that will be either insured by Fannie Mae and Freddie Mac, or at some point possibly sold to Fannie Mae and or Freddie Mac. The practical aspect of it is that about 70 to 80% of mortgages in the market right now are going to be impacted by these new regulations. So, the Fannie Mae regulations have gone into effect January 1st, 2022 and the Fred Mac regulations will go into full effect in February of 2022, but the preliminary regulations are already in effect, and we’re already seeing requests for questionnaires and disclosures.
Bernie: And these disclosures you’re talking about, they’re asking for additional information regarding the association’s long term financial conditions, structural integrity, deferred maintenance information, building code issues. So, like you said, boards and managers need to be aware that these federal requirements impact their communities, even beyond that lender questionnaire, because the impact also relates to the reserve funding requirements, right?
Matt: Correct. It used to be that in Illinois, for example, the disclosures used to be a 22.1 disclosure, which is from the Illinois condominium property act and that’s what most boards and management companies are used to the 22.1, right out of the condo act and it lists basic information that has to be disclosed and then in the past there were some standard disclosures that had to be made for Fannie Mae and Freddie Mac and now what they’re adding on this is a supplemental disclosure. This is an additional addendum that they’re now asking the buildings to and the condominium associations to fill out and you’re right, they include the questions about the structural integrity of the building. Has there been any deferred maintenance? Are there any outstanding loans related to deferred maintenance? What is the status of the reserve funding for the association? And they have changed their requirements with respect to the annual reserve funding requirement for associations.
Bernie: So, Matt let’s give people a little bit of a maybe higher-level overview, what are reserves?
Matt: Okay. So, reserves are funds that are set aside and are required under the Illinois condominium property act and if you’re a townhome or even a homeowner association, they’re also required by the governing documents, funds set aside for the long-term maintenance, repair replacement of common areas, common elements and or improvements throughout the association. And also, for unanticipated expenses, emergencies that come up. That’s the purpose of reserves.
Bernie: And in this case with these new Fannie Mae Freddie Mac regulations, when you have projects that they may consider to have unsafe conditions that might have significant– buildings that might have significant deferred maintenance, they would consider the loans that they’re ensuring they would consider it to be ineligible and that’s where you might even have a well-qualified, potential buyer into an association that may not have their loan approved because those reserve requirements are not being met.
Matt: Correct. Correct. And basically, if you look at it from Fannie Mae standpoint, they’re going to look at the condominium association. They’re going to look at the disclosure, the structural integrity, the reserve requirements, things like that. They’re going to be able to identify if there has been any deferred maintenance and when I say deferred maintenance, I mean standard routine maintenance that has been delayed and more often than not, it’s because of a financial strain that it would put on the associations. So, boards naturally delay some of these projects. And so, the federal agencies will see that and they may very well categorize the association as ineligible for Fannie Mae or Freddie Mac insurance and what that does is it constricts, it makes the potential market for mortgages smaller for prospective purchasers and that will have an impact on the market value for the units within the association. So, that’s why it’s very important for board members to be aware of that because your primary responsibility is to maintain and or improve the market value of the units in your building.
Bernie: Before we conclude our conversation, here’s a quick word from KSN attorney Kelly Elmore about the KSN app.
Kelly: I’m attorney Kelly Elmore and I’d like to ask you if you’ve downloaded the KSN app. Here are some of the app’s features, 24/7 real time access to KSN’s collection status online CSO portal featuring updates on active collection, foreclosure and landlord tenant matters, articles and booklets authored by KSN’s experienced association tax and landlord tenant attorneys, access to our schedule of upcoming educational events and you can view snapshot profiles of all KSN attorneys with contact info and mobile accessibility. The KSN app is now available for free download in the iTunes app store for your iPhone and iPad. The app is also available for free download in the Google play store for your Android phone or Android tablet, just search for Kovitz Shifrin Nesbit. We invite you to download the KSN app and learn what our law firm can do for you. We look forward to demonstrating how Kovitz Shifrin Nesbit has earned the trust of thousands of clients for over 30 years.
Bernie: And we’re back with KSN attorney Matt Moodhe and we’re discussing new federal regulations regarding mortgage requirements. We were just talking about board members. So, they’re volunteers, they’re not experts. They certainly would not be fully aware of constantly revised building codes, the due diligence, the inspection, all the reporting standards that go under scrutiny, especially after a disaster, such as the Surfside condo building collapse. So, it’s inevitable that, like you’d mentioned earlier, with buildings starting to become older, properties needing maintenance, that safety issues are just going to come up, but to be fair, even newly constructed condominium communities, they’re not going to be immune from these issues and that aging infrastructure can take a backseat because other things seem more pressing and in the short term, postponing those repairs, those replacements can seem convenient. Like you’d mentioned before Matt, to keep those assessments low, but unforeseen circumstances, potential litigation, dangerous conditions, and upkeep and infrastructure, those things that are not addressed become issues. Nevertheless, board members have that duty to maintain, to improve property values within the association and that’s where, again, working with an attorney, working with a law firm like KSN, that can help a board, help a property manager plan and deal with these regulations.
Matt: Absolutely and that’s the value of professional management. That’s the value of having a professional service team in place, including a law firm, such as KSN that specializes really solely in representing condominium, townhome and homeowner associations, because this is very specific information that even just your typical real estate closing attorney may not necessarily be aware of at this point and what we have done in that regard, we have made property managers aware of it. We have made our board members and our clients aware of these new regulations and we’ve also developed a program, which we can get into to make it a lot easier for the boards to address this situation.
Bernie: What is KSN doing? Cause we have a Fannie Mae supplemental disclosure packet, and Matt, if you can discuss that and how that service is there to assist board members and property managers.
Matt: It’s interesting. As you can imagine, because there is a lot of liability that surrounds these new requirements and the supplemental questionnaire. And so, we recognize that right away. So KSN put together a program, it’s Fannie Mae, Freddie Mac supplemental disclosure packet. Quite simply, you send an inquiry to us, we’ll send you an agreement. If you’re fortunate enough to already be a part of our monthly retainer programs, either our enhanced or premium retainer programs our work on the disclosure packet will be included in that, but even if you’re not a retainer client and you just use us as on an as needed basis, or even if you use another law firm, we can certainly assist you just on this project basis as well and it consists of submitting an inquiry to our firm and contact any attorney here at KSN. We’ll send you an agreement. The board signs the agreement. We have to get some information with respect to finances, structural integrity loans that may be outstanding, special assessments, things like that and then we will prepare the responses, but we try to take that burden off the back of the board and off the back of the property manager to the extent that we can.
So, one of the most important aspects of these new requirements is I think it’s a little different than other federal requirements that have come down the pike in the past. These requirements really require the board of directors and the management company to be proactive at a minimum in terms of maintaining your records and in terms of investigation, inspection, working with your accountants, making sure that all of these things are in place, because when you do receive that request from a potential sale in your building, you’re going to want to have all these ducks in a row. So, it’s very important that the board of directors work closely with management, call our firm, contact our firm, get as much information as possible. We can help you with some proactive steps you can take and be ready for when you receive that request, because it’s not like you can just simply get the request and magically, all this information will show up. You have to be proactive and that’s what we’re here to assist the boards in in terms of proactivity and then being able to actually respond. So, I think this is much different than some federal regulations in the past. It’s very important that the board take advantage of your professional management and your attorneys. We’ve always been a leader in this regard and we’re going to continue to do so and we’re here to help. And that’s what I think motivates us the most. We’re here to help these communities and boards navigate these complicated federal laws.
Bernie: That was KSN attorney Matt Moodhe. He practices condominium, HOA and townhome association law. KSN is an experienced legal resource, ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients for over 35 years. If you’d like to reach Matt or any of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.
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Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2022 Kovitz Shifrin Nesbit, A Professional Corporation.