New York's Cooperative and Condominium Community

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Fannie Mae Tightens Lending Rules

Safety first. Co-op and condo apartment buyers may have trouble securing financing because of new guidelines Fannie Mae issued in October 2021 in the wake of the condominium collapse in Surfside, Fla. These guidelines, which mortgage lenders must follow if they want to sell the mortgage to government-sponsored Fannie Mae, would require co-op and condo boards to change their budgeting procedures and be more aggressive in dealing with unsafe conditions. If boards don’t make the changes, lenders might not be willing to finance apartment purchases in their buildings. The changes are part of Fannie Mae’s drive to get boards to address “significant deferred maintenance and unsafe conditions.”

By the numbers. Prior to these new guidelines, Fannie Mae bought co-op share loans based on a building’s financial health. Lenders looked at the building’s balance sheet, income statements and notes on the financial statement to determine whether or not the co-op corporation was financially viable and demonstrably well run, according to Jerry Niemeier, an expert in co-op lending. “Are they showing a net operating income with a positive cash flow?” he says. “Co-ops had additional flexibility because lenders were looking at the actual financial statements.”

Lenders wanted to see that the building had sufficient reserves, often calculated at 10% of its operating budget, but a line item in the operating budget was not required. Additionally, if the lender chose not to sell the loan to Fannie Mae, it could ignore Fannie Mae’s financial guidelines.

No exceptions. The new guidelines, if enforced, will now change the process. “All of a sudden, co-ops are going to have to get in line with condominiums,” says Melissa Cohn, the regional vice president at William Raveis Mortgage. “They will be treated equally in terms of making sure that the building has sufficient reserves to fund any repairs and, more importantly, that they have a line item in their budget to replenish the reserves.”

Condominiums were always required to have a 10% reserve fund, but this could be waived if the board obtained an engineer’s reserve study and demonstrated it had sufficient reserves on hand to pay for repairs recommended by the engineer. Under the new guidelines, that waiver option is gone. Condos must now have a line item in their operating budgets, equal to 10% of the budget, that feeds the reserve fund. 

Orest Tomaselli, the president of project review at Condotek, a technology and information company that works with condo lenders, says the only way for a condo or co-op to obtain Fannie Mae lending approval using a reserve study that calls for less than a 10% reserve requirement is to apply for a building wide Fannie Mae Project Eligibility Review Service approval.

New hurdles. The results could be a chilling effect on apartment sales. “It’s going to make sales harder,” says Bruce Robertson, a real estate broker at Compass. “Buyers have enough hoops to jump through getting a loan, and now there will be more, even if the new guidelines ultimately protect them.”

Side effects. Experts predict that this type of review for apartment loans could be far-reaching. “What we’re seeing is that these underlying mortgage lenders are essentially aligning very closely with Fannie Mae’s guidelines,” says Tomaselli. “That means that a lot of these developments won’t be able to access the mortgage financing they need. It’s absolutely a reckoning.”

Early warning. How strictly Fannie Mae will follow the new guidelines is still in question. “Any lender selling loans to Fannie Mae provides their own interpretation of the guidelines,” says Niemeier. “Some lenders may choose to say, this requirement is addressing condos, but some lenders may use the condo guidelines to also address co-ops.” Buyers, brokers and boards need to heed these possible changes and make sure their financial house is in order. Those that fail to do so may find apartment sales hurt because buyers can’t find lenders willing to make loans in their buildings.

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