FANNIE MAE REJECTS CONDOMINIUM LOANS
By Stephen M. Marcus, Esq.
Issue 4 2009

As most readers are aware, over the past eighteen months, Fannie Mae has substantially revised its underwriting requirements for condominiums.  While many of the changes resulted in streamlining the loan approval process, for example by delegating review of each condominium project loan to the local lender and by reducing the legal requirements for condominium documents, a few changes resulted in the guidelines being much more stringent. 

Among the tougher new guidelines is a requirement that no more than fifteen (15%) percent of the units may be delinquent one month or more in the payment of common expenses.  In addition, Fannie Mae now requires that the local lender now certify that the condominium budget is adequate and Fannie Mae now requires that there be a line item for reserves in the amount of at least ten percent of the annual revenues.  Furthermore, Fannie Mae continues to be concerned about litigation, which might materially affect the financial health of the condominium association.  The concern relating to litigation relates to both cases where the association is plaintiff and defendant.  The one carve out Fannie Mae makes is that common area collection lawsuits will not disqualify the condominium association from complying with Fannie Mae guidelines.

 Since the only party subject to Fannie Mae’s guidelines are the local lenders, at first blush, one would question how the new guidelines affect condominium associations.  However, the reality is that Fannie Mae buys a substantial number of loans from local lenders and therefore compliance with Fannie Mae’s guidelines might be a significant factor in determining whether unit owners may sell or refinance and obtain financing. 

Recently, we have encountered at least three situations where Fannie Mae rejected loans to condominium borrowers.  While local lenders were much more relaxed in complying with Fannie Mae guidelines in the past, it appears that local lenders have become much more stringent in insuring that there is compliance with Fannie Mae guidelines.  Presumably, this is because the local lender may be required to purchase back loans from Fannie Mae if the loans do not meet Fannie Mae’s underwriting guidelines. 

In one case, a small twelve unit condominium filled out its form of lender affidavit in connection with a loan to a new purchaser.  In filling out the form, the Association noted that four out of the twelve units were delinquent by more than one month in the payment of common expenses.  Since this resulted in a delinquency rate of twenty-five (25%) percent, the percentage exceeded fifteen (15%) percent and therefore, the lender rejected the loan.

In another instance, the condominium association reported on its form of lender affidavit that the plaintiff was in a million dollar construction defect lawsuit against the developer.  Even though the Association was the plaintiff in the case, the lender rejected the loan because the financial impact of the construction defects set forth in the complaint concerned the lender in the terms of its possible burden on their borrower financially. 

In the third case, the association was the defendant in a discrimination claim brought by a unit owner.  Although the master insurance policy was defending this claim, the master insurer was only providing defense and not indemnification to the association.  In other words, the master insurer would pay the legal fees to defend the claim, but would not pay if there were a judgment after a trial.  Although the lawsuit subsequently settled for very small dollars a few weeks later, the lender unfortunately had rejected the loan in the mean time.

These cases pose real concerns to condominium associations.  In terms of delinquencies, associations should have strict written procedures for dealing with delinquencies.  For example, after ten days perhaps a late charge is assessed and the unit owner is advised of the delinquency.  There should then be a procedure for subsequent notices to the delinquent unit owner and a time period at which the delinquency is turned over to the association legal counsel. 

Litigation however is much more complicated.  It would make little sense for the association which sued the developer for construction defects not to bring the claim for fear  lenders would stop lending to unit owners and purchasers at the condominium.  The association would justifiably believe that it should exercise its rights against the developer by bringing litigation.  In the matter of discrimination claim where the condominium association is the defendant, there is little choice the condominium association has whether it is named in a lawsuit even if the lawsuit is frivolous.

While we have grave concerns relating to the rejection of condominium loans, it should be noted that in all three matters referenced above, the borrower simply went to another lender who lent the money and the purchase of the condominium unit took place.  With the banking system in crisis and with lenders becoming more stringent relating to Fannie Mae guidelines and compliance, these should prove to be interesting times for condominium associations.

Stephen M. Marcus, Esq. is a partner at the law firm of Marcus, Errico, Emmer & Brooks, P.C. located in Braintree, MA.