Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is the nation's largest player in the secondary mortgage market. Fannie Mae operates differently than the FHA; instead of insuring loans, it buys FHA-insured loans from lenders.
Flow of Money to Lenders. When banks loan all of their money to home buyers, loan activity stops until the bank can acquire new funds. This is where Fannie Mae enters the picture. Banks can bundle their FHA-insured mortgages and sell them to Fannie Mae. With a fresh infusion of cash, lenders can make new loans to home buyers and start the cycle all over.
Lender Questionnaire. Beginning January 1, 2022, Fannie Mae established standards related to deferred maintenance and unsafe conditions in condominium and cooperative developments. These are the results of the collapse of Champlain Towers in Surfside, Florida. The requirements can be found here: Lender Letter (LL-2021-14). To determine if a development meets Fannie Mae standards, associations must complete a lender questionnaire whenever a unit goes on the market. See Fannie Mae's "Project Standards."
Blacklisted Projects. Projects that fail to meet Fannie Mae guidelines can be "blacklisted" and be ineligible for loans if:
- The project needs critical repairs.
- There is a current evacuation order due to unsafe conditions.
- There are unfunded repairs totaling more than $10,000 per unit.
- The property insurance coverage is not full replacement value and doesn’t include all the coverage as required. (Note: cash value replacement is unacceptable)
- Association’s budget must include the following:
- Adequate funding for insurance deductibles
- At least 10% of the budget must be for reserves.
- No more than 15% of income comes from rental or leasing of commercial parking facilities.
- No more than 15% of owners are more than 60 days delinquent in paying their assessments.
- Commercial space may not be more than 35% of the total above and below grade square footage is used as commercial or non-residential space, the project is ineligible.
Guidelines. Because lenders need a steady flow of new cash for loans, they will conform their lending practices to both FHA and Fannie Mae guidelines. A condominium development meets Fannie Mae requirements if:
- Building Limits for the Project must be rated 100% Replacement;
- Extended Coverage Endorsement Must Apply to Building Coverage;
- Property Coverage Form Must Be “Primary” and Not “Excess”;
- An “Inflation Guard” Endorsement Must Apply to Building Coverage if available;
- No Coinsurance Penalties;
- Insurance Coverage Required. Fannie Mae eliminated “walls-in” insurance coverage terminology and changed HO-6 coverage from no less than 20% of the unit’s appraised value to an amount sufficient to repair the condominium to its condition prior to a loss whether the claim is paid by the association's property insurance, by the homeowners HO-6 policy or some combination of both.
- Fidelity Must be Equal to or Greater Than Three Months Total Dues (Recommended one year + Reserves);
- Fidelity Must Extend to Property Managers & their Employees/Agents;
- Property Policy Cannot be Shared with Unassociated Entities (i.e. Two or more different and unrelated associations );
- Projects with Central Heat/Air Must Have Mechanical Breakdown Endorsement (60,000-BTU for HVAC Heat Pumps);
- Adequate Building Ordinance Coverage must be carried for Coverage A+B+C;
- Additional Coverage that may not otherwise be available (i.e. sewer backup);
- Master Flood Insurance is Required if the Project is located in Designated Special Flood Hazard Area (SFHA); and
- Workers Compensation Policy Required where applicable by law.
- At least 51% of the project is owner-occupied.
- No more than 20% of the total square footage of the project can be used for commercial purposes.
- No more than 15% of the total units in an attached condo project can be delinquent in their HOA dues.
- At least 10% of the budget is allocated toward reserves.
- The association has adequate funding for insurance deductibles. Fannie Mae does not require a separate budget line item for insurance deductibles, but the potential cost must be accounted for in the budget. Insurance deductibles may be included in the reserve fund or may be a separate item.
- No single person or entity owns more than 10% of the units in the project.
- Management contracts may not require a penalty payment or advance notice of more than 90 days for termination of the contract.
Other Kinds of Developments. Requirements are different for new projects, small projects (1-10 units), co-ops, PDs, condo conversions, and manufactured housing.
Approved Projects. Fannie Mae posts a list of approved projects for each state on their website.
Recommendation: If associations want to maximize the marketability of units in their developments, boards should talk to their insurance brokers about Fannie Mae's requirements and determine whether any changes need to be made to their current insurance coverage. Because Fannie Mae's requirements may conflict with CC&R provisions, boards should include legal counsel in their evaluation. For more information, see Fannie Mae's 2023 Selling Guide Announcement.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.