New Freddie Mac Underwriting Guidelines For Condominium And Cooperative Projects

If you own, develop, or manage condominium or cooperative projects, you need to be aware of new Freddie Mac underwriting requirements.

Freddie Mac has promulgated new temporary underwriting requirements for mortgages secured by units in condominium and cooperative projects in need of "Critical Repairs" (defined below) and those with special assessments. The guidelines come in the wake of the collapse of the Champlain Towers South in Surfside, Florida, and apply to projects with five or more attached units, regardless of the project review type or if the mortgage is otherwise exempt from review under Freddie Mac standards. The changes will take effect for mortgages with funding dates on or after February 28, 2022. Though noted as temporary, no end date has been provided for the new requirements.

Under the new guidelines, which Freddie Mac released via Bulletin 2021-38 on December 15, 2021, mortgages secured by units in condominium or cooperative projects in need of Critical Repairs are not eligible for sale to Freddie Mac. This is the case even if repair work has already started and/or is fully funded at the time of the sale. Projects in need of Critical Repairs remain ineligible until the required repairs and/or an engineer's inspection report have been completed and documented. The new guidelines also require that any current special assessment (even if paid in full for the subject unit) be reviewed to determine if it was assessed for purposes of a Critical Repair.

"Critical Repairs" is broadly defined, but expressly includes (i) life safety hazards; (ii) violations of zoning, use, accessibility, health, or safety laws; (iii) unresolved material deficiencies that cannot be resolved by routine maintenance (e.g., mold, water intrusions or leaks, excessive wear and tear); and/or (iv) the postponement of normal maintenance that could result in advanced physical deterioration, lack of full operation/efficiency, increased operating costs, or a decline in property value.

Further, in connection with the eligibility review, the homeowner's association or management company for the condominium project will need to complete an addendum to the Condominium Project Questionnaire (Form 476), which requires, among other things, (i) the interpretation of governing documents, (ii) disclosure of all litigation affecting the project, and (iii) an evaluation of unit uses, multi-unit owners, and project insurance.

As a practical matter, condominium associations and developers should be immediately prepared to respond to document and information requests related to project and special assessment eligibility (including HOA meeting minutes, engineer's reports, reserve studies, and financials dated within 90 days of the project review date) and mindful of the impact these regulations will have on future project maintenance plans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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