In Surfside Aftermath, Freddie Mac Issues Temporary Condominium and Cooperative Project Requirements Resulting in Stricter Loan Regulations
The Federal Home Loan Mortgage Corporation, better known as “Freddie Mac,” issued a Bulletin 21-38 titled “Temporary Condominium and Cooperative Project Requirements and Topic 5600 Reorganization” on Thursday, December 15, 2021. Its stricter requirements, which go into effect February 28, 2022, concern certain real estate and communication properties in need of critical repairs.
For community associations, there are immediate consequences. They must be prepared to address lender questions and provide qualified responses immediately as countless sale contracts are already being written for closings occurring on and after February 28, 2022.
“Condominium and co-op associations throughout the state must be prepared to address and answer Freddie Mac’s questions immediately to ensure they meet closing dates that are only weeks away,” said Dennis Eisinger, managing partner at Eisinger Law.
Eisinger also expects that Florida’s legislature will pass significant legislation in early 2022 regarding building safety, required engineering studies, and mandatory reserves.
As one of Florida’s leading community association law firms, Eisinger Law breaks down Freddie Mac’s federal loan regulations and explains how the tougher rules are already affecting more than 48,500 community associations throughout the state.
This change in federal underwriting requirements is just one of many unfolding in the wake of the tragic collapse of the Champlain South Tower in Surfside, Florida. The aftermath has resulted in tighter scrutiny surrounding the risks of residential buildings with aging infrastructure in need of critical repairs. These apparent risks, along with industry guidance, prompted Freddie Mac to issue its temporary project review requirements.
“In addition to regular maintenance costs, associations must also factor in expenses for major structural improvements and long-term maintenance requirements,” said Eisinger. “We help our clients properly allocate resources necessary to budget for a variety of expenditures. If an association keeps kicking the can down the road and deferring necessary repairs, Freddie Mac has made it clear – the association or an individual unit owner will not qualify for financing.”
Note, since Freddie Mac does not back all mortgages, not all are subject to its guidelines. However, indications are that other lenders could soon issue similar guidelines.
The Surfside collapse also brought attention to the need for a condominium to have adequate budget reserves. The Freddie Mac Bulletin highlights the need for a basic 10% reserve requirement and details the need to perform reserve studies that fall under the 10% threshold. Condominium associations are now compelled to not only factor in adequate reserves into annual budgets, they must also effectively plan for long-term maintenance needs. If they fail to do so, federal financing which typically offers favorable rates could be in jeopardy.
What you need to know:
- Units in condominiums with “critical repair” needs are not Freddie Mac eligible, even if the administration is diligent, and the work has started, and even if the repairs are fully funded.
- Engineer’s reports likely will be required as proof of completion for pending repairs;
- Special assessments are to be evaluated to determine if they are for critical repairs;
- Lenders may require legal opinions from Association’s counsel for pending litigation issues that might affect structural issues;
- Associations will be required to update or fill out the new questionnaire;
- Formally effective for settlement dates of February 22, 2022, but loan underwriters may require compliance with loans before that date.
“Critical Repairs”: Repairs and replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building(s) and/or that impact unit values, financial viability or marketability of the project. These repairs and replacements include:
- All life safety hazards
- Violations of any federal, State or local law, ordinance or code relating to zoning, subdivision and use, building, housing accessibility, health matters or fire safety
- Material Deficiencies
- Significant Deferred Maintenance
“Material Deficiencies”: Unresolved problems that cannot reasonably be addressed by normal operation or routine maintenance and which include:
- Deficiencies which, if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year
- Deficiencies that will likely result in a significant escalation of remedial cost related to any material building components that are approaching, have reached or exceeded their expected useful life or whose remaining useful life should not be relied upon in light of actual or effective age, abuse, excessive wear and tear, poor maintenance and exposure to the elements
- Any mold, water intrusions or potentially damaging leaks to the project’s building(s)
“Significant Deferred Maintenance”: The postponement of normal maintenance, which cannot reasonably be resolved by normal operations or routine maintenance, and which may result in any of the following:
- Advanced physical deterioration
- Lack of full operation or efficiency
- Increased operating costs
Eisinger Law is a multi-practice Florida law firm focused on community association law, real estate law, developer representation, civil/commercial litigation, insurance law, estate planning and probate. For more information, visit eisingerlaw.com or call 954-894-8000.