New Rules For Condo Mortgages By Freddie Mac | Defects In Condo Buildings May Hold Up Sales Or Reduce Prices

With New Federal Requirements in Place, South Carolina Condo Owners May Face Lower Property Values and Difficulties Selling a Condo if a Building has Water Intrusion or Structural Problems

Stating that “in the aftermath of the collapse of the Champlain Towers South in Surfside, Florida, the risks of residential buildings with aging infrastructure and in need of Critical Repairs have been brought to the forefront of discussion throughout the nation,” Freddie Mac announced new project review requirements for condominiums in need of critical repairs and condominiums with special assessments. Associated with those temporary requirements, Freddie Mac issued a new Form 476A for condo sellers to complete and which is intended to allow sellers to determine whether a condo community meets the new project review requirements. The new requirements take effect on February 28, 2022. Fannie Mae implemented similar requirements that took effect on January 1, 2022.

Most home loans are purchased by Freddie Mac or Fannie Mae in the secondary market after the initial lender such as a bank makes the loan to the home buyer. These quasi-government entities are responsible for liquidity and stability in the mortgage industry. Hence, most mortgage lenders will conform to their requirements.

Why is it important for condo mortgages to be eligible for purchase by Freddie Mac or Fannie Mae? A loan eligible for purchase by Freddie Mac or Fannie Mae is known as a “warrantable” loan. If a purchaser cannot obtain a loan eligible for purchase by Freddie Mac or Fannie Mae, the purchaser will have to obtain a non-warrantable loan which typically has an interest rate one half point to one point higher than a warrantable loan and a larger down payment requirement. However, once construction defects are addressed through litigation and repairs, a condo purchaser can refinance and obtain a warrantable loan, however, this option likely still results in higher expenses.

What are the new condo review requirements? Freddie Mac’s new condo requirements provide that a mortgage secured by a condominium unit is not eligible for sale to Freddie Mac if the condominiums need “Critical Repairs.” The condos will remain ineligible for sale to Freddie Mac until repairs are completed. Freddie Mac defines “Critical Repairs” as including life safety hazards, violations of any law, ordinance, or code including building codes, “Material Deficiencies,” and “Significant Deferred Maintenance.”

“Material Deficiencies” is defined as including any deficiencies which “have the potential to result in or contribute to critical element or system failure within one year.” A person would struggle to come up with a building deficiency which would not at least have the “potential” to contribute to the failure of a critical element or system within one year. The definition is so broad that presumably nearly any deficiency in a building falls within the definition. “Material Deficiencies” is also defined as including deficiencies that “will likely result in a significant escalation of remedial cost related to any material building components that are approaching, have reached or exceeded their typical expected useful life.” Again, nearly any deficiency in a building is likely to result in increased remedial costs, and this is an incredibly broad definition that would encompass the vast majority of building deficiencies.

Most significant for the building deficiencies causing the greatest problems for condo buildings in South Carolina, “Material Deficiencies” is defined as including any “mold, water intrusions or potentially damaging leaks.” Therefore, any South Carolina condo building suffering from water intrusion is not eligible for Freddie Mac mortgage purchases until the problems are repaired.

Freddie Mac defines “Significant Deferred Maintenance” as the “postponement of normal maintenance, which cannot reasonably be resolved by normal operations or routine maintenance and which may result in any of the following: advanced physical deterioration, lack of full operation or efficiency, increased operating costs, decline in property value.”

To determine whether a condo building meets the new requirements, Freddie Mac’s new Form 476A, available on Freddie Mac’s website, asks numerous questions related to the structural integrity of and reserve finances for condo buildings, including:

  • When was the last building inspection by a licensed architect, licensed engineer, or any other building inspector?
  • Did the last inspection have any findings related to the safety, soundness, structural integrity, or habitability of the project’s buildings?
  • Is the association aware of any deficiencies related to the safety, soundness, structural integrity, or habitability of the project’s buildings?
  • Are there any outstanding violations of jurisdictional requirements (zoning, ordinances, codes, etc.) related to the safety, soundness, structural integrity, or habitability of the project’s buildings?
  • Does the project have a funding plan for its deferred maintenance components/items to be repaired or replaced?
  • Does the project have a schedule for the deferred maintenance components/items to be repaired or replaced?
  • Has the association had a reserve study completed on the project within the past three years?
  • What is the total of the current reserve account balance?
  • Are there any current special assessments unit owners are obligated to pay?
  • Are there any planned special assessments that unit owners will be obligated to pay?

The bottom line for condominium association boards is that water intrusion and other construction defects not only result in damage to the physical structure of the buildings and necessitate expenditures by the association to repair, defects also will result in difficulty for owners seeking to sell their units and lower sales prices for those units. Ignoring water intrusion and construction defects in the hopes the issue will go away will do nothing but harm the association board and the individual owners. Instead, condo association boards should quickly retain construction defect lawyers to investigate the problems and pursue claims to hold those responsible accountable for the repair costs.

Condo owners should be involved in their condo association’s governance and push their boards to conduct inspections for construction defects and deferred maintenance issues, to timely pursue claims for construction defects, to undertake and fund a program of regular building maintenance, and to fund adequate reserves to replace aging building components at the end of their useful lives. For most people, their home or condo is one of their largest or their largest investment and whether that investment increases in value or loses value is largely determined by whether the condo association is proactive in protecting that investment.

Updated on April 26, 2022

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