Fannie Mae Announcement 08-01 Results in New Underwriting Guidelines in Condominium Communities
Fannie Mae Announcement 08-01 became effective on March 1, 2008. The lengthy document provides among many things, that each time a loan is submitted to Fannie Mae by a Lender in a condominium community the lender must warrant that: 1) the project meets all of the applicable eligibility requirements including the new legal, budget and delinquent account requirements that were set forth in Announcement 07-18; and 2) the Lender isn't aware of any change in circumstances that would result in the project not satisfying Fannie Mae's eligibility criteria.
The project eligibility requirements set forth in Announcement 07-18, require that:
1) no more than 15% of the units may be more than one month delinquent;
2) the association budget must have funding for reserves equal to at least 10% of the budget and;
3) the association budget must provide adequate funding for insurance deductible amounts.
These requirements may be impossible for some associations to meet given today's economy and the ever increasing pressure to keep assessments low by not funding reserves. However, this may be much to do about nothing and we may not seen any actual impact on associations. Several years ago Fannie Mae issued an announcement that indicated they would not buy a loan if the association was involved in litigation. This type of broad limitation could have resulted in most loans getting denied just because the association had a pending collection case. However, Fannie Mae turned its head and said "that's not what we really meant."
One also has to wonder whether we will see modifications to Lender Questionnaires as they attempt to comply with this issue. I am not aware of any changes at this time, but with the current sub prime lending issues and lenders being under great scrutiny from the federal government and Wall Street, they may want to improve their image by tightening their processes and attempting to shift risks to others. If so, adding questions of the association addressing these issues will be likely. So be on the lookout for them.
As with many federal laws, you question whether their measurement tools are indicative of anything - including the financial viability of the association. If an association doesn't have monthly assessments but rather annual or quarterly, how do you answer whether more than 15% of the units are more than one month delinquent? If an association has a line item for reserve in the budget but never makes the contribution, how does that help the financial stability of the association? If the association has no capital improvement for which it is responsible are reserves of 10% still required? If an association can borrow to cover reserves expenses or insurance deductibles does that matter? If the payment of insurance deductibles has been allocated to owners, does the association still have to have money budgeting for these deductibles?
After reading this, you may think I have more questions than answers ... that is probably true. If you want to try and find the answers click here to view the recent announcement.
This is just another example of the government's attempt to regulate an industry about whose intricacies it knows nothing. The less involvement from government we have in managing and opereating HOAs, the better.
Regarding the followingÑ ¨As with many federal laws, you question whether their measurement tools are indicative of anything - including the financial viability of the association. If an association doesn't have monthly assessments but rather annual or quarterly, how do you answer whether more than 15% of the units are more than one month delinquent?¨ It would not matter how the assessments are billed, it is only whether 15% are delinquent by one month or more. The time of the billing has nothing to do with it.
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