New Lending Rules - Fannie Mae and HUD

The fallout from our current economic crisis is hitting all of us, sometimes in ways we least expect. While many homeowners are struggling to hold onto their homes, many are faced with the prospect of having to sell. In the present economy, that is difficult enough. However, for those whose homes are condominiums, Fannie Mae has implemented new guidelines that can make it more difficult than previously to complete a sale. HUD has adopted similar new temporary regulations which went into effect on December 7, 2009 and remain effective until December 31. 2010, at which time more restrictive permanent regulations become effective.

Why is this a concern? Historically, Fannie Mae and Freddie Mac (which tends to follow Fannie Mae closely) own or guaranty over 50% of the country’s outstanding first mortgages. HUD insures another significant amount. If condominium communities don’t follow the new guidelines or regulations, their units will not be eligible for Fannie Mae underwritten or HUD insured loans. Imagine the difficulty in selling condominium units when the only financing available comes from sources that are not connected to Fannie Mae or HUD.

This bulletin only addresses the new Fannie Mae guidelines. Next month we’ll discuss the new HUD regulations.

Some of the more significant requirements for a condominium community to obtain Fannie Mae approval include:

  • Insurance must cover 100% of the insurable replacement cost of the project improvements, including the individual units in a condo project.
  • No more than 20% of the total square footage of the project can be used for nonresidential/commercial purposes.
  • No more than 15% of the total units in a project may be 30 days or more past due on their association dues.
  • At least 51% of the total units in the project must have been conveyed or be under a bona fide contract for purchase to owner-occupant principal residence or second home purchasers.
  • Lenders must review the homeowners’ association projected budget to determine that: (1) it is adequate (i.e., it includes allocations for line items pertinent to the type of condo); (2) it provides for the funding of replacement reserves for capital expenditures and deferred maintenance at least 10% of the budget; (3) and it provides adequate funding for insurance deductible amounts.
  • No single entity—the same individual, investor group, partnership, or corporation other than the developer during the initial marketing period—may own more than 10% of the total units in the project.

There are other requirements as well. However, these are the provisions that, in our experience, have the potential to most significantly affect an existing condominium community. Associations will need to make sure that they comply with these requirements, and that their governing documents address them, so as to maximize owners’ ability to sell their homes.

If you have questions about whether your association's governing documents satisfy Fannie Mae guidelines, please give us a call.