Ever since the 2021 Surfside condo collapse in Miami, Florida lenders are worried about the condition of older condominium projects. Lenders do not want to loan on a project where their equity is not secured by a livable building in good safe condition. For this reason many older condos are denied funding backed by Fannie Mae and Freddie Mac.
Mae and Mac maintain a "mortgage blacklist" of condo complexes deemed ineligible for their mortgage programs. I've emailed them asking for it but they refuse to share it publicly. The condo projects are denied due to concerns about inadequate insurance, structural issues or insufficient reserves. This makes it difficult for owners to sell or refinance using these loan programs. This "blacklist" is basically a list of condo complexes which have been denied funding based on these requirements. This does not affect non Mae and Mac mortgages but if the project doesn't meet these requirements, they may still be denied by other lenders.
The most important thing a condo owner can do to prevent their condo from being blacklisted is fully research the project before you buy, sell and as you own it. Be sure to get a copy of all documents especially the budget, inspection report and the condo reserve report. A good condo project will have all future repairs noted with 70% of the future repair costs already paid in a reserve fund. The funds come from the HOA dues.
The problems arise with older buildings which need more and more repairs as they age. HOA dues don't always cover the increasing expenses so dues must be raised from time to time. Special assessments are needed for the larger unplanned repairs. Some condo owners don't want to pay increased HOA dues or assessments because they are on fixed incomes. Condo owners must vote for special assessments. This is what happened with Surfside condos. They knew they needed major repairs but the collective owners refused to vote for the larger HOA dues and special assessments to get the work done. The building also had structural issues when it was first built which needed to be repaired.
Here's a more detailed breakdown of what Mae and Mac need to see before they will fund a condo. I got this information from Fannie Mae and Freddie Mac websites.
Reserve Fund Requirements:
Minimum Reserve:
Fannie Mae and Freddie Mac require that a condo project have a reserve fund that is at least 10% of the annual operating budget.
Reserve Study:
A current reserve study, conducted by a qualified professional, is essential to determine the adequacy of the reserve funding plan.
Funding Plan:
The reserve study should include a funding plan that outlines how the association will reach and maintain the minimum reserve level.
Reserve Study Content:
The reserve study should include an inventory of major components, a financial analysis, and an evaluation of the current reserve fund adequacy.
Reserve Study Frequency:
It's recommended to have a reserve study performed and updated every three years by a qualified professional.
Reserve Study Compliance:
The reserve study must meet or exceed requirements set forth in any applicable state statutes.
Delinquency Requirements:
Delinquency Limit: No more than 15% of the total number of units in a project can be 60 or more days delinquent in the payment of their HOA assessments.
Other Important Considerations:
Critical Repairs:
Mortgages secured by units in condominium or cooperative projects in need of critical repairs are not eligible for sale to Freddie Mac.
Lender Review:
Lenders are now required to review all structural and mechanical inspection reports, including reserve studies, completed in the prior three years from the loan project review.
Unfunded Repairs:
Lenders are prohibited from issuing loans for complexes with unfunded repairs totaling $10,000 or more per unit.
Special Assessments:
Lenders must obtain and review information for any special assessments imposed by condominium associations to determine if they address a critical repair.
Insurance:
The project must have insurance that complies with the applicable requirements.
Mary Cummins of Cummins Real Estate is a certified residential licensed appraiser in Los Angeles, California. Mary Cummins is licensed by the California Bureau of Real Estate appraisers and has over 35 years of experience.
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