In the early morning hours of June 24, 2021, the Champlain Towers South in the Miami Beach area collapsed killing 98 people. It was headline news for days as rescuers searched for survivors. After the dust settled, federal investigators pulled together evidence showing the 12-story, 136-unit oceanfront condo building had substantial concrete structural damage to its pool deck area that was long overdue for repairs.
Over time, the investigation found design failures, shoddy construction, damage, and neglect that created the perfect conditions for a deadly chain reaction. Signs of structural damage to the pool deck and garage ceiling were reported as early as 1996. In the aftermath of the collapse of the Champlain Towers South, Freddie Mac issued bulletin ~ 2021-38 (TEMPORARY CONDOMINIUM AND COOPERATIVE PROJECT REQUIREMENTS AND TOPIC 5600 REORGANIZATION) and Fannie Mae issued Lender Letter (LL-2021-14).
Fannie Mae’s rule changes apply to condo and co-op loans purchased on or after Jan. 1, 2022. Freddie Mac’s rule changes are effective for mortgages with settlement dates on or after February 28, 2022. The changes are just now beginning to be broadly felt across the condo market. Combined, Fannie and Freddie purchase or guarantee about 70% of all mortgages created in the United States. When they make rule changes the remainder of lenders almost all follow their lead.
The exact words differ between Fannie and Freddie but in essence both require HOAs to provide information about significant deferred maintenance or if they have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions. Both have a list of questions needing to be answered with the intent of uncovering any known significant deferred maintenance issues that may impact the safety and structural integrity of the building. The questionnaires to the HOAs also require information about the financial plans for addressing safety and structural integrity issues.
On the surface, this is all well-intended. However, it has HOAs running very scared.
The HOAs are now receiving these Fannie and Freddie questionnaires every time one of the units in the condo is preparing to close a sale – both new and re-sales. HOAs are fearful that any legal discussion about the building integrity or reserve funds to correct known deficiencies will put them at risk of liability. The liability could spread far and wide to include all HOA stakeholders such as the property management company, board members, inspectors, engineers, and the association membership as a whole.
Failing to answer the agencies thoroughly and completely is almost certain to force lenders to decline a mortgage application. It’s not only affecting buyers and sellers of individual units. In some cases, new projects that need to solve design and construction difficulties must fulfill these new deficiencies and financing requirements to obtain funding to complete projects currently underway. However, the immediate effect is being felt most strongly by sellers and buyers of individual units.
The rules went into effect as “temporary rules” but are widely expected to become permanent. The result is that the industry will need to quickly learn how to deal with these changes and liabilities or smooth flowing sales in the marketplace will grind to a halt. Right now, the early weeks are seeing many condo associations outright refuse to fill out and submit the loan addendum.
That leaves buyers with two choices. Pay all-cash for the condo or find a lender willing to hold the loan without Fannie or Freddie underwriting. Obviously, most condo buyers don’t have the funds to make an all-cash purchase. If they can find a bank, credit union, or private lender willing to hold the loan, it will come with a much higher interest rate. Signed deals are facing this dilemma today and word is spreading fast about how difficult condo loans have become to close.
Buyers that can afford million-and-a-half-dollar penthouses are more likely to be able to pay cash or find alternative financing. However, the guy trying to buy his first $155,000 home will be hurt the most. These new rules will shut another door on first-time buyers and the newly divorced spouse trying to start over.
Condo sellers will begin feeling the effects very soon and probably even more than first-time buyers. Clearly, the new rules will cut deeply into the pool of potential buyers for their condos. Even if they resort to something as dramatic as seller financing, the value of their units is going to drop dramatically in price.
In short course, HOAs must figure out how to submit the new Fannie and Freddie questionnaires without taking on excessive liabilities. In due course, it probably means that HOAs will have to find ways to generate funds to make needed repairs. Individual owners and future sellers can serve their own best interests by attending HOA meetings to stay up-to-date with information about their HOAs. By participating in meetings, HOA members will become more involved with the overall condition of the association and the buildings they live in.
What knowledge do you have to share about condos and HOAs as a result of the Champlain Towers South catastrophe? Please leave your comments.
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