Fannie Mae and Freddie Mac

Fannie Mae, the commonly used name for the Federal National Mortgage Association, and Freddie Mac, the commonly used name for the Federal Home Loan Mortgage Corporation, are enterprises that were created at the instance of the federal government decades ago but now operate as private companies with government oversight. Both Fannie Mae and Freddie Mac serve as a “secondary market” for mortgage loans. These government sponsored enterprises [“GSEs”] purchase mortgages from banks, package these mortgages in blocks with other mortgages, and then pledge such blocks of loans as collateral for large-denomination bonds issued by the GSEs and offered for sale to institutional investors in the world market.

The originating banks' reserves are freed up by these arrangements. Indeed, the GSEs were originally established to purchase mortgage loans that would otherwise clog the reserves of banks and thrift institutions and leave private mortgage companies cash-poor. By selling mortgages to GSEs, cash flows back from the GSEs to the selling institutions, permitting them to originate more residential mortgage loans to qualified borrowers without running afoul of federal and state banking laws that require banks to maintain minimum amounts of cash on hand [reserves] to pay depositors in the event of a run on the institution during hard times.

Fannie Mae and Freddie Mac, like the FHA, also want to ensure that the mortgages they buy are unlikely to default, and/or to minimize the likelihood that these GSEs would be financially harmed in the event of a default by the borrower under a mortgage loan secured by a unit in a condominium project. Further like FHA, Fannie Mae and Freddie Mac also require that the

FHA's Condominium Project Approval and Processing Guide from 2011 may be found at https://www.hud.gov/sites/documents/11-22MLGUIDE.PDF . Its provisions are supplemented by Mortgagee Letters that are published online.

3

2

condominium project in which the unit providing collateral for the loan must meet detailed condominium project eligibility criteria established by these GSEs.4 Again like the situation with FHA, these project eligibility criteria include matters that need to appear in the condominium's declaration and/or other governing documents, but which are simply not found in state statutes. What is sometimes maddening for the practitioner and other interested parties, the project eligibility criteria for these GSEs [and particularly Fannie Mae] are sometimes different from those of the FHA in significant ways.

The general pattern of topics and language appearing in the declarations for condominiums across the country has been shaped as much by the underwriting requirements of FHA, VA, Fannie Mae and Freddie Mac as by particulars of state law. Each of these organizations early on recognized insufficiencies in the laws of many States but found comfort in language appearing in second generation statutes such as the Uniform Condominium Act [ “UCA” ]and the Uniform Common Interest Ownership Act [ “UCIOA” ]. FHA and VA adopted formal standards and published them in the Code of Federal Regulations.16 FHA has supplemented its CFR guidelines with a Condominium Project Approval and Processing Guide that provides further guidance to lenders and condominium document drafters.17 VA condo approval requirements differ somewhat from those of FHA. At one time, the VA would approve all FHA approved communities, but that has since been changed. Because VA's market share is substantially less than FHA's share, this article will omit any further discussion of VA condominium project requirements. Instead, the article will first discuss Fannie Mae's requirements, as they apply to the drafting of condominium declarations, and then return to a discussion of FHA's comparable requirements.

A. Fannie Mae Requirements for Condominium Declarations

Fannie Mae has played a major role in shaping the general pattern and content of condominium declarations for decades. It has done so by establishing in its published Selling Guide certain “Project Standards” for condominium projects that must be adhered to in the governing documents of a condominium project if mortgages on units within the project will be eligible for acquisition by Fannie Mae. Freddie Mac has always had similar, if somewhat looser requirements. For simplification, only Fannie Mae's standards are described in this Chapter of

16 FHA's regulatory scheme for the application of it loan guaranty program to condominium projects is found at 24 CFR 234.26. VA's comparable regulations appear in 38 CFR 4356 – 4360.

17 FHA's Condominium Project Approval and Processing Guide from 2011 may be found at https://www.hud.gov/sites/documents/11-22MLGUIDE.PDF . Its provisions are supplemented by Mortgagee Letters that are published online.

9this article, because if a condominium project is eligible under Fannie Mae's stricter standards, the project will invariably satisfy the corresponding requirements of Freddie Mac.18