In direct response to the tragic collapse of the Champlain South Tower Condominium in Surfside, Florida, Fannie Mae issued Lender Letter 2021-14. As of January 1, 2022, Fannie Mae’s new rules regarding the structural integrity of condominiums provide that Fannie Mae will not purchase loans for units in condominiums that have significant deferred maintenance or unsafe conditions. While the requirements set forth in the Lender Letter are styled as “temporary,” they are effective as of January 1, 2022 and “until further notice.”
Specifically, loans secured by units in condominium projects with significant deferred maintenance or in projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions are not eligible for purchase.
“Significant deferred maintenance” is defined in Lender Letter 2021-14 as: (a) full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time; or (b) the project has deficiencies, defects, substantial damage, or deferred maintenance that: (i) is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements; (ii) the improvements need substantial repairs and rehabilitation, including many major components; or (iii) impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing.
Additionally, projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or re-certifications would also be ineligible for purchase under Fannie Mae’s guidelines.
The above definition of significant deferred maintenance does not include routine maintenance to a building, or damage or deferred maintenance that is isolated to one or a few units. Loans secured by condominium units in need of routine maintenance or isolated deferred maintenance may still be eligible for purchase, subject to all of Fannie Mae’s other conditions and restrictions.
In response to the Lender Letter, condominium developers, unit owners associations, and management companies will need to ensure that reserves are properly budgeted and allocated to prevent deferred maintenance from accumulating.
Fannie Mae’s Lender Letter 2021-14 can be found here.
Freddie Mac, in bulletin 2021-38, issued similar guidance that went into effect on February 28, 2022, which can be found here.