By Michael J. Gelfand, Esq. / Published April 2022
Who would have seen it coming so soon and seemingly out of nowhere! A wave of change may upend resales of condominium and cooperative units and likely will also impact many homeowners association communities.
What is this wave? It is a significant change in mortgage loan underwriting. These are the thresholds a borrower must show before a loan is approved. Lenders are requiring associations to show better funded reserves, fully paid maintenance programs, and structures that are certified to be safe and in good condition.
The impact will be substantial in terms of budgeting and planning. Why? Lenders drive a considerable part of the resale marketplace. Increasingly, lenders want to make certain that the property which they are providing a mortgage for is structurally sound and that the association has the funds to complete proper maintenance. Lenders expressly acknowledge that the effort is a result of the Surfside Champlain Towers South Condominium collapse.
Think about the practical impact. If a buyer cannot obtain a loan for a unit in a building, then the buyer may go elsewhere, driving prices down even in this runaway market. If a building has a reputation of not having proper reserves and not being properly maintained, then brokers may steer prospective buyers away, depressing prices further.
The collateral effect will be demands by owners to correct the situation. This then brings the situation full circle as owners start to calculate the cost of deferring maintenance and waiving reserves. While the focus is on condominium and cooperative projects, expect homeowners associations that maintain homes’ structures, roofs, and walls to be swept into the wave.
How will this strike hit? Mortgage lenders are starting to require detailed information regarding a community. Associations will be asked to complete a “questionnaire” documenting a community’s maintenance and reserve status as well as other criteria important to lenders. The thought is that if owners continue to stymie proper funding of reserves and timely maintenance, then there will be swift economic impacts.
Prepare for a deluge of information requests from lenders that may initially overwhelm management and volunteer administrators. In the long term this process may create long-term liabilities and perhaps claims against associations.
The Federal Home Loan Mortgage Corporation, also known as Freddie Mac, issued a Bulletin with the captivating title “Temporary Condominium and Cooperative Project Requirements and Topic 5600 Reorganization.” The requirements apply to all condominiums with five units or more even if the condominium is otherwise exempt from review.
Before describing the highlights, a few cautions. The regulatory wording indicates that this is not restricted to Florida but is national. Of course, Freddie Mac does not buy all mortgages, but it has an impact far beyond its immense purview.
A few of the highlights may compel Florida condominium associations to effectively plan long-term maintenance needs because waiting until it is needed may cut off Freddie Mac’s mortgage financing!
These definitions may cause pain!
There is more. Interestingly, the Bulletin highlights “reminders” of the need for reserves. Reserve studies are required to justify short funding.
Anticipate disputes over whether something is a routine repair or a critical repair, and requirements to complete the form and who pays for the completion.
Beware of just filling out the form with guesses and providing answers when you do not have good or complete information. You know who will be blamed when there is a problem! Note that the follow-up information indicates that in some circumstances lenders will accept information from other than associations, such as from an appraiser.
If you have not seen the forms or the bulletins, here are the links to Regulation material: https://guide.freddiemac.com/app/guide/bulletin/2021- 38?utm_source=eloqua&utm_medium=email&utm_campaign=2021-12-15_POLICY_GuidePolicy.
To the new questionnaire: https://sf.freddiemac.com/content/_assets/resources/pdf/forms/condo_questionnaire_form_full.pdf.
Florida’s 2022 legislative session started with over 20 bills touching Florida community associations. The post-Surfside bills include mandatory reserves and regular inspection reports and reporting formats.
The annual mystery—or misery, depending on your perspective—is which bills will make it through the gauntlets of both Florida legislative houses and be signed by the governor. What seems certain to be adopted is the expansion of owner flag display rights to include the flag of the newest military branch, the Space Force.
What else is being considered?
There are many other areas under consideration, and for most bills it is not certain what will be approved and what will drop to the floor. Those interested can access the bills at Online Sunshine at www.leg.state.fl.us/.
Michael J. Gelfand, Esq.
Senior Partner, Gelfand & Arpe, P.A.
Michael J. Gelfand, Esq., the senior partner of Gelfand & Arpe, P.A., emphasizes a community association law practice, counseling associations and owners how to set legitimate goals and effectively achieve those goals. Gelfand is a dual Florida Bar board certified lawyer in condominium and planned development law and in real estate law, a certified circuit and county civil court mediator, homeowners association mediator, an arbitrator, and parliamentarian. He is a past chair of the Real Property Division of the Florida Bar’s Real Property, Probate & Trust Law Section, and a Fellow of the American College of Real Estate Lawyers. Contact him at firstname.lastname@example.org or (561) 655-6224.