Fannie Mae, Lender Letters and Reserves

“A bank is a place that will lend you money if you can prove that you don't need it.”

- Bob Hope

Fannie Mae is technically known as the Federal National Mortgage Association. It was a government sponsored company, founded in 1938 during the Great Depression. It's goal, then and now, is to increase the number of mortgages. Mortgages mean people are buying homes, which the government hopes people will do an which keeps the economy humming.

However, a lot of smaller, local banks do not always wish to hold onto a mortgage for thirty (30) years. It's a bit of a risk that a local couple will stay married, have steady jobs, and always pay their mortgage, for thirty (30) years, tying up the bank's money. So Fannie Mae was created not to lend money to owners, but to buy mortgages from banks, which frees up the bank's money to make more loans, and Fannie Mae assumes the risk that someone will default on a mortgage.

And Fannie Mae is huge. In 2018 (I have not seen more recent statistics) it was the 21st largest corporation in the United States as ranked by Fortune magazine by total revenue. And it is vast. It holds a slice of somewhere between 40-60% of all of the mortgages in the country.

Fannie Mae makes money by buying these loans from all banks, freeing up money in the banks to make more loans. Fannie Mae then take these loans, bundles them to together and sells them to investors, like a stock in a company, in the hope that people will pay back their loans. When they do, the investors make a lot of money; when they don't, investors lose money.

So, Fannie Mae, of course, wants to make money, and that leads to condominium associations.

Fannie Mae occasionally issues what are called Lender Letters. These are communications sent to banks notifying the banks that if they want Fannie Mae to buy a loan from them, there are new rules by which they have to abide.

The latest Lender Letter was issued in October of this year, which is why I write. The long-term holders of Fannie Mae mortgages want to make sure people will pay their mortgage and not default. If they do, then the people who have invested by buying the loans will lose money.

One thing the shareholders of Fannie Mae believe is that if a condominium association faces a special assessment, people will not be able to pay the loans; they will default on their loans; and that will collapse the housing market. The only flaw is that in the more than twenty years I have been practicing condominium law, I have never heard of someone defaulting on a loan because of a special assessment or being foreclosed on or filing for bankruptcy. (What has happened to Surfside City may result in that, but that would be the first.). Why does this not happen?

If it looks as though it may cost a lot of money to make repairs, too much to collect by way of a special assessment, associations simply take out a bank loan for the capital repairs, to be paid back over ten or twenty years, with a moderate, but manageable increase in the condominium fee - and banks make more money because of the loan. But Fannie Mae seems to have either overlooked this partial reality or it doesn't care. So it came up with a new plan.

It used to be, from an earlier Lending Letter that Fannie Mae would purchase a loan if a condo association's budget had one of two notations. In order to ensure a condo association had enough money for capital repairs, such as paving, roofing and siding, an association either had to have a line item in its budget that showed 10% of the total budget was to be set aside for reserves, or that an association was following a reserve study.

However, in the October 2021 Lending Letter Fannie Mae removed the reserve study exception. Now, if a local bank was to lend money to an owner in a condo association, either one of two things has to happen. Either your credit rating has to be really, really good, matched with a large deposit, or your condo association's budget has to have the 10% line item for reserves in its budget, even if an association is well funded for repairs and its reserve study shows it does not need 10% placed into reserves each year. To be clear, the 10% mark was just arbitrarily picked and has no actual relationship to what is actually needed, but it makes Fannie Mae feel good. The result is that now the pool of banks that will lend money to a buyer becomes shallower, and that makes it harder to sell, which one would think Fannie Mae would not want.

The reality is associations should have proper reserves based upon a well created and well followed reserve study is because association are supposed to avoid special assessments. Owners don't like them; boards of directors don't like passing them; and Fannie Mae and its investors certainly don't like them. So spare all in your association the pain of a special assessment and the difficulty of selling their home, by simply getting a proper reserve study done and abide by it, thereby avoiding special assessments.

Oh, and add the 10% line item to your budget. So silly. Sigh.