Important GSE Requirements for Condos and Coops
As the largest purchasers of loans in the residential secondary mortgage market, the GSEs or government-sponsored enterprises (Fannie Mae and Freddie Mac) have set guidelines that must be met before either GSE purchases those loans. This process exists primarily between lenders and the GSEs “in the background” and is rarely something that a borrower is even aware of. However, a borrower should know and understand the process because it can be a major factor that affects whether a lender will commit to issuing a loan.
While the underwriting process for single-family homes is straightforward, the GSEs consider many more data points in purchasing condo and coop loans. Lenders that rely on the GSEs to purchase loans must meet the GSE guidelines. Borrowers who wish to finance the purchase of a condo or coop should be aware of this process and understand that while many guideline requirements have remained constant for many years, a recent example demonstrates how, like everything in life, GSE guidelines can change.
#1: Building Condition Analysis
The GSEs have long been concerned that projects plan and have the financial ability to maintain the physical structures of condo and coop projects.
However, as you may recall, in June 2021, the Champlain Towers Condominium in Surfside, Florida, partially collapsed as a result of, in part, uncorrected maintenance issues. The GSEs looked at this as an opportunity to focus on condo and coop project safety more specifically by creating a questionnaire addendum that, if utilized by a lender, must be completed by the Condominium Homeowners Association or the Cooperative Corporation. This addendum increases the focus and disclosure on various aspect of safety that include:
- Building safety inspections and outstanding violations
- The soundness of the building’s infrastructure as determined by industry professionals
- Habitability affected by the condition of basic services and structural elements like plumbing, heating, roof, and facade
This addendum can provide an additional level of scrutiny and understanding that not only protects the financial interests of all parties involved, but also helps to keep people safe and promotes proactive building maintenance and infrastructure improvements.
#2: Financial Viability
Not only do the GSEs need to know about safety, soundness, and structural integrity, they also need to see that the Condominium Owners Associations and Cooperative Corporations have funds to address needed maintenance and repairs. For this reason, the GSE’s guidelines include specific metrics around financial viability and reserve funding.
#3: Safety and Soundness
What is the most important thing to remember here? Fannie Mae and Freddie Mac, the largest purchasers of residential loans on the secondary market, need to know that the collateral security for those loans is structurally and financially sound.
The criteria that Fannie Mae and Freddie Mac added to their project eligibility requirements after the Champlain Towers tragedy have been characterized as burdensome by some, creating concern among Condominium Owners Associations and Cooperative Corporations about their ability to meet these added requirements. However, there is a different, more positive way to see these additional requirements; they help protect the financial interests of all parties involved and the lives of those who call these condos and coops home, while promoting positive and proactive measures toward building maintenance.
How Project Risk Evaluation Partners (PREP) Can Help
If it sounds complicated, it doesn’t have to be. A project risk and eligibility review is the process that includes analysis of this information and that is exactly what PREP does. Here at Project Risk Evaluation Partners (PREP), we want you to understand what goes into the underwriting of a condo or coop project so that you’re never caught off guard. Circumstances change, even at the GSEs. But PREP can help add clarity to the process. Contact us to find out more about what we do.