Forced Savings - For a Good Reason

“The road to success is always under construction.”

- Arnold Palmer

It's budget season. That means you have to start worrying about next year. But one thing that should worry you, and which is directly related to your association's budget, is the fact that Fannie Mae is tightening its requirements for lending.

Fannie Mae is the largest secondary mortgage lender in the nation. It lends money to banks, so banks can give loans, which Fannie Mae then buys from the banks. Fannie Mae is backed by the federal government, so there is little chance of it going under. In turn, that makes it a good partner for banks.

In order for Fannie Mae to buy loans from banks, it sets guidelines for what it is looking for in loans, and those guidelines have recently changed once again with regard to condominium units, making it harder to get loans. This means it's going be to harder to sell your unit unless and until your association adopts certain actions that show up in its budget.

As a result of the Surf City catastrophe Fannie Mae (and others) tightened its lending practices. They want to minimize the losses that have occurred as a result of foreclosures of damaged homes, so they are requiring much more in the way of condominium inspections of infrastructure.

They look at certain saving practices, and if your association is not following them, and someone tries to get financing to buy your unit, and the lending bank does not get the right answer, or any answer, your association gets put on a bad list, and you will have a very hard time selling your unit.

Though the Fannie Mae's bad list is confidential, this past summer some found out there are now more than 1,400 associations around the nation that are on the list, up more than 50% in the past few years.

How does this process work? There are several factors at which banks look. For instance, each condominium association is required to have a line item in its budget that shows it is putting (at least) 10% of their total budget into its reserve account each year to help show it is saving for long-term expenses. Doing so helps avoid special assessments, loans or, in the worst case scenario, the pushing off of maintenance projects because they have become too expensive which, in turn increases the chance of catastrophes (which is what happened in the Surf City matter).

There is no rhyme or reason to this 10% figure. Before the new policy went into place, you could either show the 10% line item or show adherence to a qualified reserve study. But no more. Now it's a randomly chosen percentage that shows Fannie Mae that at least there is some attempt to save for long-term capital expenses.

Another ding comes if you operate as a sort of hotel where there's a front desk, and owners, guests/renters check in and out. These are known as a condotels. There are not a lot of these around, mostly up north, but beware. If you buy in, you likely will find it very hard to sell.

Investor ownership is another factor in the Fannie Mae loan consideration process. This process breaks down into two sub-groups. The first concern of the lenders is if one person or entity owns greater than 20% of the units, regardless of whether they are large or small, the units, the person, not the owner. The second is where more than 50% of the units are rented out.

The issues just noted are the easy ones to address. The increasingly problematic factor for which Fannie Mae looks is the last issue. This is where your association has major infrastructure that it is responsible for like, oh, I don't know, the roofs, siding, clubhouses, giant HVAC systems (for those in high rises,) pools, and more. Fannie Mae wants to know these items won't fall apart, cause damage, foreclosures, and real monetary problems for Fannie Mae.

How does Fannie Mae know about these things? When someone wants to buy a unit and applies for a mortgage, the bank, at the direction of Fannie Mae sends, off a questionnaire, which are very specific questions on the infrastructure of the Association. If the Association does not send the questionnaire back fully answered, the lender likely won't lend and your Association gets dinged by Fannie Mae making it harder for the next person to sell their unit.

Property managers and boards of directors are rightly wary of answering these questionnaires as they might not have the expertise to know if the roofs are fading or the HVAC systems that services the building is working properly or the elevator is more than serviceable. And if they and answer without full knowledge, well you can bet if something goes wrong there will be suit and perhaps liability for the Association.

What to do? First, as I have noted in the past, get a reserve study done by a licensed professional. Then amend the process by which you get your reserve study done and have it, or at least the infrastructure portions of it, done by a certified engineer. Then update it every three years or so.

When a questionnaire comes in, attach the reserve study with a statement something along the line of, “Please see that attached reserve study for the status of structural elements.” This answers it fairly and properly defers the substance to the person, the engineer, who has the knowledge and experience, and lets the lender know you've done what you're supposed to do.