Opinion: FHFA should not allow Condo HOA industry to influence safety, reserve rules

CAI, NAR, and MBA don’t represent the interests of homebuyers and housing consumers

By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com

It’s been more than a year since the catastrophic partial collapse of the Champlain Towers South Condominium in Surfside, FL. That tragic, presumably preventable accident triggered Fannie Mae and Freddie Mac to institute temporary restrictions on eligibility of condominium housing projects for mortgage loans.

Fannie Mae and Freddie Mac don’t directly issue mortgage loans. The Government Sponsored Entities (GSEs) have historically purchases home loans, including loans for condominiums, from lenders. That helps to guarantee a positive return on investment for the mortgage industry, freeing up banks and private lenders to issue more new loans to homebuyers.

But, since the Surfside building collapse, the GSEs — and lenders who plan to sell new mortgages to Fannie and Freddie — have stepped up their game to protect their interests. Fannie and Freddie now require borrowers to verify building safety and sufficient reserve funds to cover major structural repairs and/or major projects such as roof and siding replacements. Condo associations must complete questionnaires about their community, and meet new safety and reserve funding requirements, in order for buyers to qualify for mortgage loans for their condominium units.

See Fannie Mae’s questionnaire here, specifically pages 7 and 8.
Freddie Mac’s new safety addendum can be viewed here.

As predicted in a previous IAC post, the new Fannie and Freddie restrictions are causing a lot of angst for the condominium industry, and putting a damper on resale of units in communities with a lot of deferred maintenance and low or non-existent reserve funds.

Real estate trade groups lament delayed, cancelled condo sales


In fact, according to a recent article in the Washington Post, Condo Tek, an evaluation firm working for Fannie Mae, has so far blacklisted at least 1,000 condo associations as unsafe, and therefore ineligible for mortgage loans.

Condo sales are now being delayed or falling through, because, apparently, the condo association industry is advising condo boards to refuse to answer certain questions about the safety of their buildings.

The Washington Post article describes one particular story of a condominium townhouse owner, whose closing date was delayed, when the condo association refused to complete the lender questionnaire.

Reading between the lines, it seems that the condo association’s Canadian-based management company giant, First Service Residential (FSR), and its affiliated community association attorneys, are worried that condo HOA board members could be held liable for claiming no awareness of building safety issues, only to discover later, that they were dead wrong.

It’s important to note that FSR is a prominent member of Community Associations Institute (CAI), a Virginia-based trade group that primarily represents the interests of condo and HOA management and legal professionals. Once again, CAI stands on the side of protecting the interests of condo management company CEOs vs. protecting the interests of owners and home buyers.

At the same time, National Association of Realtors (NAR) laments that condo sales are falling through, dashing the dreams of their buyers seeking more “affordable” housing options. And the Mortgage Bankers Association is all up in arms due to complaints from lenders that can’t get loans approved for first-time and downsizing homebuyers.

The three trade group organizations — CAI, NAR, and MBA — are now joining forces to convince FHFA to scrap — or at least modify — condo structural safety questionnaires implemented in 2022. According to the Washington Post:

CAI, MBA and NAR have written letters to the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, asking for a pause in the implementation of the rules. MBA’s letter offers suggestions on how to reword each of the questions so that Fannie Mae and Freddie Mac can obtain the information they are seeking without unduly burdening the condo associations.

Source: Surfside tragedy makes condo buying challenging nationwide
Real estate agents, condo associations and mortgage brokers say the new rules from Fannie Mae and Freddie Mac are having a chilling effect on the market 
By Kathy Orton (Washington Post)
Updated July 14, 2022 at 2:40 p.m. EDT|Published July 14, 2022 at 9:00 a.m. EDT

But FHFA should not cave into condo HOA industry influence.

Don’t blame the questionnaire

In the Washington Post article, Kathy Orton quotes several condo HOA industry spokespersons. It’s obvious to any savvy reader that CAI, NAR, and MBA are attempting to paint a picture of Big Bad Fannie and Freddie spoiling the party for aspiring homeowners, and thwarting the ability of cash-strapped condo owners to sell their units for top dollar to new buyers who are reaching beyond their comfort level to own a condo instead of renting one.

Meanwhile, IAC and other supporters of Fannie Mae’s and Freddie Mac’s temporary lending restrictions recognize that it’s not the questionnaire that’s preventing condo owners from selling their units. It’s a condo association’s failure to maintain the property, combined with the condo board’s and management company’s lack of transparency, that’s causing Fannie and Freddie to refuse to guarantee loans for properties that are mismanaged and poorly maintained.

Another important point: in my opinion, Fannie Mae’s blacklist of ineligible condominiums ought to be made public. I think U.S. taxpayers and all housing consumers have a right to know the facts about the safety of condo or townhouse unit they intend to buy or lease.

Let’s use a little common sense. If a condominium property is in great condition, and its reserves are healthy, then the association and its governing board have nothing to hide! But if structural and financial conditions are less than idea — well, it stands to reason that no one wants to air that dirty laundry, especially if it leads to fewer buyers offering much lower sale prices.

There’s nothing ”affordable” about owning a condo unit in a housing project that’s fundamentally unsafe and in need of insanely expensive repairs. Owners who stretched their budgets to the max to own a condo usually cannot afford 5 or 6 figure special assessments to cover costs, due to deficient association reserves.

By the time a condo association reaches this day of reckoning, it has already neglected its duties for years, if not decades. The condition of a declining housing project can only remain hidden for so long, before the truth comes crashing down. That’s what literally happened with the infamous condominium building in Surfside, FL. And most of its owners were not poor, and did not use their condos as their primary residence.

Imagine the devastating impact of enabling buyers with modest incomes to own condos or townhouses, and to live in a common ownership community that’s on the brink of disaster. With no disposable income to spend on huge special assessments or extended payment plans, under the threat of HOA liens and possible foreclosure, and with nowhere else to go, condo owners become trapped by circumstances beyond their individual control.

That’s the point of adding safety and funding requirements: not only to avoid loss of life in another disastrous building collapse, but also to avoid putting future condo owners on the hook for digging the community association out of its deep hole of many yers of management dysfunction.

Condo questionnaire ‘workarounds’ not likely to keep homeowners, condo residents ’safe’

Reading the entire Washington Post article, one learns that condo featured in the story is a townhouse, not a stacked apartment unit. And, although there was a slight delay, the buyer’s sale did, in fact, go through about a week late. And that’s because the lender decided that they could review 6 months of board meeting minutes, in lieu of getting a signed questionnaire from the condo association.

Really? What could go wrong?

Incredibly, the lender made the erroneous (convenient?) assumption that condo HOAs reliably produce complete and accurate records of their board meetings.

In my personal experience, and that of the vast majority of my readers, HOA meeting minutes are often incomplete and inaccurate.

Most likely, one reason the lender was willing to compromise was because this wasn’t a unit in a multistory condominium, but a townhouse. But also, I strongly suspect a workaround was arranged because — let’s face it — mortgage lenders don’t make money if they don’t issue loans. 

Such workarounds, if they happen frequently, might explain, in part, why Fannie Mae claims it hasn’t notice a significant impact to the condo market (yet), due to its temporary safety policies and amended questionnaires.

To be fair, though, Fannie Mae does point out that the new safety and reserve fund standards are meant to prevent borrowers from buying into “physically unsafe or financially unstable projects.” That, I believe, is a most worthy goal — one that should not be undermined by real estate industry trade groups that profit from a hot condominium market, and have a heck of a lot to lose if the market becomes cold as ice in the coming months and years.

Deborah Goonan

is the creator of Independent American Communities (IAC), a Housing Consumer Education blog focusing on HOA governed Common Interest Developments.
IAC documents legal, social, and economic challenges — and explores solutions to problems — in U.S. HOA-governed common interest communities.

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