Because of the potential housing market meltdown, Fannie Mae has adopted new underwriting guidelines in terms of individuals buying housing in condominium and community associations.Â In the past, the major focus of lenders has been on the buying power of the purchaser, but in today’s volatile housing climate, the new rules also stress the financial strengths of condominium and community associations.Â Lenders will be required to assume more responsibility for reviewing the finances of condominium and community associations, which will cause those associations to focus more intently on their budgets and their reserve policies than many have tended to do in the past.
Association Budget Items That Must Be Verified
Under the new guidelines, Fannie Mae wants lenders to perform full scale reviews of most condominium loans as opposed to the spot reviews that lenders have performed in the past.Â The full scale reviews will require lenders to verify the following four essential association budgetary items:
- The association has an “adequate” budget.
- The budget contains a line item allocating ten percent (10%) of annual revenues for the association’s reserves.
- The association has available funds equaling the deductible under the association’s master insurance policy.
- No more than 15 percent (15%) of the common area fees are delinquent by more than one month.
While the first three requirements are most likely already being meant by condominium and community associations, the fourth requirement could cause a definite problem for associations and lenders alike.Â With the housing market at an all time high foreclosure rate in the State of Michigan, as well as the entire country, community and condominium associations may have a difficult time keeping under the 15 percent (15%) delinquency rate, especially the smaller associations.
How Do These Guidelines Affect The Buyer?
While these are recent guidelines imposed by Fannie Mae, I have been preaching for years that potential buyers must look into the financial condition of any association into which they intend to move.Â It is only sound business practice that one would strongly consider the economic state of any investment, and for most Americans the purchase of a home is the largest investment they will make in their lifetime.Â For example, if the roofs of buildings in a distant portion of a condominium project are deteriorating and the condominium documents provide that the association is responsible for the maintenance of the roofs (as is usually the case), the fact that your own roof is in good condition and will not soon leak may not mean that your investment in the condominium project will be a good one.
If the association’s reserves are not adequate, the association may be required to levy substantial special or additional assessments to defray the cost to replace the roofs at the other end of the project.Â Or, if the roofs were defectively constructed by the developer and the right to sue has not expired, the association may start a lawsuit against the developer, which, potentially, may cost tens of thousands of dollars to prosecute.Â The bottom line is that these new imposed guidelines also may protect the buyer from getting into a situation where he or she does not want to be.