“Walls In” Condo Unit Coverage Required By Many Lenders
A HO-6 policy is like a regular homeowner’s policy, but for a condominium unit, and with a lot more extras. HO-6 insurance policies cover the interior of the unit and personal property inside–commonly known as “studs in” or “walls in” coverage.
HO-6 Now Required By Lenders
Under the new Fannie Mae (FNMA) and FHA overhaul of condominium lending guidelines, lenders are now requiring HO-6 policies for new condo unit purchases. Sounds like common sense, but HO-6 policies weren’t always required by lenders, and many condominium unit owners were under the mistaken impression that the master condominium insurance policy covered all damage to the interior of their unit as well as damage to furniture, appliances, etc. That isn’t so. In most cases, that master insurance policy covers common areas such as the hallways, roof, basement, elevator, boiler, and common walkways, for both liability and physical damage–but not the inside of units.
Coverages
HO-6 policy benefits include:
Coverage for damage to personal property such as furniture, computer equipment and clothing
Fill in the gaps of the master insurance policy and cover losses under master policy deductibles
Personal liability coverage
Interior walls and floor coverings coverage
Coverage for improvements or upgrades (most master insurance policies only cover the original condition and value of the unit).
Usually has small deductible and fairly inexpensive
Under the new lending rules, an HO-6 insurance policy must provide coverage for no less than 20% of the condominium unit’s appraised value.
High Deductible Protection
Another benefit of obtaining an HO-6 policy is that in certain situations, it will provide gap coverage caused by the often high deductibles on a master insurance policy. These days, condominium associations have been cutting costs by increasing their deductibles, anywhere from $10,000 to even $50,000. What’s more, condominium documents often provide that the unit owner is responsible for losses falling below the deductible. A well-tailored HO-6 policy will protect you in this situation. Here is a good article about the tug-of-war on deductibles.
Loss Assessments
HO-6 policies can also provide coverage for assessments applied an individual unit due to a direct loss to the condominium. The loss must be a “peril” covered under the unit owner’s individual policy, not be levied by a governmental agency, and not be related to earthquake damage. A standard condo policy typically includes up to $1,000 in loss assessment coverage. Additional coverage can be covered for a nominal amount.
The HO-6 policy is a must have for every condominium owner!
Buying a condominium unit can be more involved than buying a single family home. This is because you have to worry about both the unit itself and the condominium project as a whole.
10 Questions You Must Ask Before Purchasing A Condominium Unit
To borrow from a famous phrase, not all condominiums are created equally. Some condominiums are very well run; some are quite poorly run and underfunded. Buyers interested in purchasing a condominium unit must do their homework: not only about the condition of the individual unit they are interested in purchasing, but on the financial health and governance of the condominium as a whole. Remember, you are buying into the entire project as much as you are the unit, and your decision will impact your daily living and your ability to re-sell.
Here are the 10 questions buyers should ask when deciding to purchase a condominium unit:
What is the monthly condominium fee and what does it pay for? The monthly condominium fee can range quite dramatically from condominium to condominium. The fee is a by-product of the number of units, the annual expenses to maintain the common area, whether the condo is professionally managed or self-managed, the age and condition of the project, and other variables such as litigation. For budgeting and financing you need to know the monthly fee and exactly what you are getting for it.
What are the condominium rules & regulations? Condominium rules can prohibit pets, your ability to rent out the unit, and perform renovations. Make sure you carefully review the rules and regulations before buying. Needless to say, the buyer’s attorney should review and approval all condominium documents, including the master deed, declaration of trust/by-laws, covenants, unit deed and floor plans to ensure compliance with state condominium laws as well as Fannie Mae and FHA guidelines, as necessary.
How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment. Get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands, others like the Boston Harbor Towers $75 Million renovation project, in the millions. You need to be aware if you are buying a special assessment along with your unit. It’s a good idea to ask for the last 2 years of condominium meeting minutes to check what’s been going on with the condomininium.
Is there a professional management company or is the association self-managed? Usually, a professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas. But for smaller condominiums, self-management works just fine.
Is the condominium involved in any pending legal actions? Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Legal action equals attorneys’ fees which are payable out of the condominium budget and could result in a special assessment. In some states, you can run a search of the condominium association in the court database to check if they’ve been involved in recent lawsuits.
How many units are owner occupied? A large percentage of renters can create unwanted noise and neighbor issues. It can also raise re-sale and financing issues with the new Fannie Mae and FHA condominium regulations which limit owner-occupancy rates. If your buyer is using conventional financing, check if it is a Fannie Mae approved condo. If FHA financing, check if it’s an FHA approved condo. (Thanks mortgage specialist Lou Corcoran for the links)
What is the condominium fee delinquency rate? Again, a signal of financial trouble, and Fannie Mae and FHA want to see the rate at 15% or less.
Do unit owners have exclusive easements or right to use certain common areas such as porches, decks, storage spaces and parking spaces? Condominiums differ as to how they structure the “ownership” of certain amenities such as roof decks, porches, storage spaces and parking spaces. Sometimes, they are truly “deeded” with the unit, so the unit owner has sole responsibility for maintenance and repairs. Sometimes, they are common areas in which the unit owner has the exclusive right to use, but the maintenance and repair is left with the association. Review the Master Deed and Unit Deed on this one.
What Does The Master Insurance Policy Cover? The condominium should have up to $1M or more in coverage under their master condominium policy. For buyer’s own protection, they should always buy an individual HO-6 policy covering the interior and contents of the unit, because the master policy and condo by-laws may not cover all damage to their personal possessions and interior damage in case of a roof leak, water pipe burst or other problem arising from a common area element. Ask for a copy of the master insurance policy and don’t forget to check the fine print of the by-laws. Sometimes, there’s language that would hurt a unit owner in case of a common area casualty. Condominiums over 20 units should also have fidelity insurance to protect against embezzlement.
I posted this list on the Realtor ActiveRain website and it was the featured post, generating a slew of great comments from real estate brokers around the country.
Of course, a good real estate attorney will help buyers and their realtors with this “due diligence.” As part of our standard condominium representation, we will review the following condominium documents and issues:
Master Deed and amendments
Declaration of Trust/By-Laws, Rules & Regulations
HOA Covenants/Restrictions
Unit Deed and Floor Plans
Condominium Budget and Capital Reserve Fund
Fannie Mae/FHA Compliance Provisions
Condominium Annual and Special Meeting Minutes
Pending or Contemplated Special Assessments or Litigation
We will also build in provisions into your purchase and sale agreement to protect you in case there are unanticipated or undisclosed issues with the condominium which affect your willingness to move forward with the transaction. Happy condo hunting!
In the recent and well publicized case of the disgruntled condominium buyer suing her realtor over the disclosure of second-hand smoke, the jury today sided with the realtor. The Boston Globe reports today that the jury took less than an hour to deliberate whether a realtor was liable for allegedly not disclosing to a condominium buyer that her downstairs neighbors were heavy smokers. The trial lasted an entire week, so the fact that the jury was out less than 1 hour demonstrates that they completely rejected the condominium buyer’s claims. Given the facts reported, I think the jury got it right here.
As the Globe reports, although the claims were ultimately rejected, the fact that this case made it all the way to a jury should serve as a warning to realtors to be careful about what they say (or don’t say) about any type of property condition, whether on site or off site. Don’t make statements unless you’ve investigated the facts, and don’t make promises that you cannot back up. That’s what got this realtor into trouble in the first place…
My Boston.com fellow blogger, buyer’s agent Rona Fischman, has fielded several questions recently regarding the Massachusetts Lead Paint Law. Prospective renters have called apartment listings only to be hung up on abruptly with a “It’s not deleaded!” if they hear a child in the background or if they answer truthfully about having children. Mothers have received termination notices when the landlord discovers they are pregnant – usually of course for tenancies at will. Finally, there is a listing this week in a local paper for an owner occupied 2 family rental which states “Unit Not Deleaded” right in the ad.
The short answer is these are all likely violations of the Massachusetts Lead Paint Law, and could expose the offending landlords to stiff penalties and damages.
Under the Massachusetts Lead Paint Law, whenever a child under six years of age comes to live in a rental property, the property owner has a responsibility to discover whether there is any lead paint on the property and to de-lead to protect the young children living there. A property owner or real estate agent cannot get around the legal requirements to disclose information about known lead hazards simply by refusing to rent to families with young children. They also cannot refuse to renew the lease of a pregnant woman or a family with young children just because a property may contain lead hazards. And property owners cannot refuse to rent simply because they do not want to spend the money to de-lead the property. Any of these acts is a violation of the Lead Law, the Consumer Protection Act, and various Massachusetts anti-discrimination statutes that can have serious penalties for a property owner or real estate agent.
As the stories above show, landlords routinely flaunt, or are just plain ignorant of, the law. The issue becomes what to do about it and is it worth the time and aggravation? I guess that depends on your situation. Certainly, if you are being threatened with a discriminatory eviction, your first step should be to contact the Massachusetts Commission Against Discrimination (MCAD) and your local Fair Housing Commission. In a recent case, the MCAD hit a property owner with $25,000 in damages and fines for evicting a young family to avoid de-leading. Next consider hiring a housing discrimination attorney. If you are low on funds, the attorney may agree to take the case on a contingency because violations of the lead paint law and discrimination laws provide for the reimbursement of attorneys’ fees and enhanced damages.
As for the “Unit Not Deleaded” ad, while may be truthful, it might as well read “Children Under 6 Not Wanted.” I would advise a landlord to avoid this sort of indirect discriminatory preference.
Lastly, the law is conflicting regarding owner occupied two family homes. Chapter 151B, the state anti-discrimination law, exempts owner occupied two family homes from the prohibition of discrimination against children. However, there is no such exemption written into the lead paint law. So if a child is born into a owner occupied 2 family, it must be de-leaded. Vacation/recreational rents and short term (31 days or less) rentals are also exempt from the lead paint law.
Yesterday the Boston Globe reported on a controversial lawsuit by Alyssa Burrage, a condominium buyer, against a realtor over the disclosure of second hand smoke emitting from downstairs neighbors. Click for the story: Suit Over Second Hand Smoke Targets Real Estate Broker. As the hundreds of comments to the story indicates, this lawsuit raises a host of legal and public policy issues. I’ll focus on the legal issues.
Under Massachusetts consumer protection regulations governing real estate brokers, a broker must disclose to a buyer “any fact, the disclosure of which may have influenced the buyer or prospective buyer not to enter into the transaction.” This is somewhat of a subjective standard; what may matter to one buyer may not matter to another. If a broker is asked a direct question about the property, she must answer truthfully, accurately, and completely to the best of her knowledge. Further, a broker cannot actively avoid discovering the details of a suspected problem or tell half-truths.
With that legal backdrop, let’s review the facts of this case. Ms. Burrage, who suffers from asthma, claimed that her broker failed to disclose the existence of the heavy smokers downstairs—despite the fact that she admittedly smelled “the unmistakable stench” of cigarette smoke at several visits to the unit. The broker – who worked for the same company as the listing broker (which may raise some thorny conflict of interest/agency issues) – assured her that the smell would dissipate once she painted and renovated the unit, the suit claims. Ms. Burrage claims that she wouldn’t have purchased the unit in the first place if she had known about the smoke problem.
The case boils down to the appropriate scope of a broker’s duty to disclose potentially adverse property conditions, not only within the property itself, but off-site. The Massachusetts Supreme Judicial Court has held that off-site physical conditions may require disclosure if the conditions are “unknown and not readily observable by the buyer [and] if the existence of those conditions is of sufficient materiality to affect the habitability, use, or enjoyment of the property and, therefore, render the property substantially less desirable or valuable to the objectively reasonable buyer.”
This case has all the makings of a very slippery — and dangerous — slope for real estate brokers. If Ms. Burrage’s claim is accepted, realtors would be conceivably obligated to investigate every neighbor to determine whether their smoking (or other bad habits) will negatively affect the particular buyer’s use or enjoyment of the property. That’s patently unrealistic. Where then does the law draw the line? If it’s not smoking, it’s smelly food preparation (don’t laugh, I’ve dealt with those cases), marijuana smoking, loud parties, floor stomping, or other “noxious” behaviors. Buyers of condominiums have to accept that they aren’t buying into a pristine, sanitary bubble.
I’m not unsympathetic to Ms. Burrage’s plight. I’m not a smoker, and I cannot stand the smell of cigarette smoke. But to me, this is really a neighbor-to-neighbor issue. The realtor should have no liability in this type of case.
In the spirit of the New Year, let’s look back at the top legal issues of the past year and peer into the crystal ball for a glimpse at 2010.
Top 5 Posts For 2009
#1. The Catch-22 Impact of New Fannie Mae Condominium Regulations. In January, Fannie Mae was the first government agency to drop a big bucket of cold water on condominium lending underwriting practices which some say contributed to the condominium market meltdown. FHA and others would follow later in the year. The new guidelines had condominium developers and associations, buyers and sellers in a tizzy, as Fannie Mae imposed much tougher pre-sale requirements, condominium financial guidelines and the imposition of unit owner HO-6 insurance policies, among other requirements.
#2. New FHA Condominium Lending Guidelines Sure To Slow Financing and Chill Sales. The Federal Housing Administration (FHA) followed Fannie’s lead in tightening condominium lending requirements. Originally proposed over the summer, FHA delayed implementation of the new guidelines until earlier in the month and watered down some of the most stringent requirements, after major lenders and community association groups complained.
#3. There’s Nothing Standard About The Massachusetts Standard Purchase and Sale Agreement. Great to see a post about buying a new home ranking so highly. An indicator of the recovery of the Massachusetts real estate market perhaps? Check out this post for the ins and outs of the very seller friendly standard form P&S and how to level the playing field if you are a buyer.
#4. Massachusetts Land Court Reaffirms Controversial Ibanez Decision Invalidating Thousands of Foreclosures. If you were following the foreclosure mess, you couldn’t have missed this judicial bomb dropped by Massachusetts Land Court Judge Keith Long. The so-called Ibanez ruling invalidated thousands of foreclosures across the state because the lenders did not record their paperwork up to date at the registries of deeds. Lenders have appealed the ruling, but hundreds of foreclosure titles remain unmarketable in the wake of this controversial decision. More to come in 2010.
#5. Short Sales Get Boost From New Obama Treasury Guidelines. On December 1, the Obama administration set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed.
All signs are pointing to a real estate rebound for the Bay State in 2010, with home and condominium sales surging over 50% from last year in November. I have definitely seen an uptick in new purchases on my end and we are preparing for a busy 2010. Along with good news from the real estate market, however, comes higher interest rates as the bond market reacts to positive news. My friend mortgage consultant Brian Cavanaugh at SmarterBorrowing.com does a good weekly mortgage market update and is presently advising borrowers to lock into current rates as he predicts rates will rise in 2010 to close to 6% for a 30 year fixed. Of course, when rates go up, buying power goes down, thereby cooling the market a bit.
Regulatory
Hopefully we’ve seen the end of increased regulation of the condominium market from the government giants. Let’s toast that they can let the market take its course with the new guidelines in effect.
Stimulus/Home Buyer Credit
As the economy continues to recover, you can probably bet that the Obama administration is going to let up on the stimulus/credit throttle for 2010. So take advantage of all the credits available now, because this is probably the last you will see of them for awhile.
Lastly, technology, the internet and social media will play an even bigger role in how realtors, lenders and real estate attorneys do business. The National Association of Realtors says that 87% of home buyers use the Internet to search for homes. I tell all my Realtor friends they must have a strong Internet presence and to take advantage of blogging, social media and Active Rain to boost their online presence.
For attorneys, in 2009 we saw the tip of the iceberg for electronic recordings and closings as well as online transaction management. Our office just set up an online transaction management system where buyers, sellers, loan officers and realtors can view the status of the loan whenever they want through a secure online portal. It’s a fantastic tool. While electronic closings are a way’s away from gaining the necessary critical mass of lender acceptance, many Massachusetts registries of deeds are now e-recording, and that will continue to rise. The next decade will certainly bring electronic closings and paperless transactions into the norm.
Well, let’s clink our glasses to a very happy, healthy and fruitful New Year!
With 11 days and counting until all lenders and closing attorneys must be in compliance with the new RESPA requirements and the new Good Faith Estimate (GFE) and HUD-1 Settlement Statement, HUD has released two helpful documents:
The booklet encourages retaining a competent real estate attorney in the transaction:
Before you sign a sales agreement, you might consider asking an attorney to review it and tell you if it protects your interests. If you have already signed your sales agreement, you might still consider having an attorney review it. (Ed. You definitely want an attorney to review and mark up the purchase and sale agreement, or else you’ll wind up signing the standard form and getting burnt).
If choosing an attorney, you should shop around and ask what services will be performed and whether the attorney is experienced in representing homebuyers. You may also wish to ask the attorney whether the attorney will represent anyone other than you in the transaction. (Ed.: You definitely want to choose an attorney who specializes in real estate, as opposed to an attorney who dabbles in it. Residential real estate practice, once considered fairly basic, has rapidly changed into a complex maze of regulations, disclosures and standards. You need someone who does this every day.)
In some areas, an attorney will act as a settlement agent to handle your settlement. (Ed.: In Massachusetts, it is fairly common that the same attorney will represent a buyer and close the loan for the lender. This is called a dual representation and often saves the home buyer money on closing costs. The buyer’s and lender’s interests are aligned as both parties must have clear and marketable (and insurable) title to the property).
The booklet also provides very helpful encouragement for buyer’s to purchase title insurance, which I always recommend:
Title Services and Settlement Agent
When you purchase your home, you receive “title” to the home. Certain title services will be required by your lender to protect against liens or claims on the property. Title services include the title search, examination of the title, preparation of a commitment to insure, conducting the settlement, and all administration and processing services that are involved within these services. Many lenders require a lender‟s title insurance policy to protect against loss resulting from claims by others against your new home. A lender‟s title insurance policy does not protect you.
If a title claim occurs, it can be financially devastating to an owner who is uninsured. If you want to protect yourself from claims by others against your new home, you will need an owner’s policy.
Kudos to HUD for finally advocating the benefits of title insurance!
I’m getting pretty tired of all the condominium developers and realtors out there claiming and clamoring that the new FHA condominium guidelines which went into effect this week are the next coming of the Apocalypse. The fact remains that the new guidelines will ensure that condominiums are financially sound and well-run, and that’s good news for everyone: lenders, consumers, buyers, unit owners and realtors alike.
David Fletcher, a Florida real estate broker and former developer who has survived every recession since the 1970’s, gets it. In an article in Realty Times yesterday, he outlines 10 benefits of the new rules, especially from a sales and marketing perspective:
More buyers will enter the market because they can afford the lower down payment.
No single investor can purchase more than 10% of the units, so the idea of a controlled association by one or two investors is no longer a threat.
More inventory will offer wider choices tending to keep prices in check, as “FHA approved’ condominiums come on line.
More real estate agents will be willing to show condominiums to their buyers, because the lender who provides the mortgage will have to approve not only the condo documents, but the condo association’s budget, reserve account and its fidelity insurance policy.
New construction developers have the guidelines needed to create urgency in their pricing strategies, which is key to building and maintaining momentum.
Commercial lenders will have a more comfortable level with developers. While the 50% presale requirement may look obtrusive, it is actually a benefit to the developer, because it will create urgency for buyers to purchase.
Established associations that have dragged their feet to get their finances in order, now have a valid value-based reason to become “FHA Approved.”
Real estate agents will show FHA approved condominiums with confidence in the association’s finances, not just because the down payment is low.
Forward thinking lenders will hustle to become a “an approved lender’ in resale and new communities alike
Knowing the property already has approved lenders will make competition for listings tighter and will attract more buyers and more prospects to the listing.
David believes — and I agree with him — that “FHA Approved” will become one of the most sought after seals of approvals for condominiums in 2010 and beyond. Let’s hope that all the realtors, lenders, and condominium developers out there realize the benefits that can be gained from obtaining FHA approved status.
Today, the controversial Federal Housing Administration (FHA) condominium mortgage rules go into effect. I’ve written about them extensively on this blog here. The new FHA rules, in summary, require that condominiums undergo a much more rigorous financial review prior to being accepted into FHA mortgage programs. Sort of like a cardiac stress test for condominiums.
I was interviewed this morning by Associated Press real estate reporter Alan Zibel about the impact of the changes. I said that despite the short term hurt on lenders and the extensive underwriting required, I believe they are a good thing for consumers and condominium buyers because they require condominiums to get their financial collective acts together. Mr. Zibel graciously quoted me in the article:
While the rules could be tough for builders, they will protect consumers because lenders will be forced to be more careful about which projects they fund, said Richard Vetstein, a real estate lawyer in Framingham, Mass. “On the whole, it’s a good thing,” he said. “Financially sound condominiums make better investments.”
Here’s a direct link to the AP story as reprinted in the Los Angeles Times.
The AP article also touched on the difficulty new condominium developers face with the tougher rules. A Utah condo developer, who shelved a 300 unit project in favor of free standing homes, characterized the new rules as a “debacle.” But the FHA already watered down the new rules from those previously proposed, so builders could be dealing with far worse. On the whole, I think the rules are fair, balanced, and unfortunately necessary in light of the condominium meltdown in states such as Florida and California.
After several revisions and delays, the Federal Housing Administration (FHA) has finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium projects. FHA first proposed the revisions back in June (under Mortgagee Letter 2009-19). The new guidelines are effective December 7, 2009; however, some of the requirements are phased in through January 31, 2010.
There has been a considerable amount of controversy involving HUD/FHA’s proposed requirements for obtaining FHA mortgage insurance for condominiums. The newest guideline revisions are in response to the strong reaction from condominium associations and mortgage industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.
The latest guidelines are described in two separate HUD/FHA documents:
Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects)
Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).
Under the Temporary Guidance:
The “Spot Loan” approval process will continue through February 1, 2010, after which it will be replaced by the new Direct Endorsement Lender Review & Approval Process (DELRAP); and
The 30% cap on FHA loans per condo project will be expanded to 50% until December 31, 2010. Concentrations may be increased to 100% if certain additional conditions are met. After January 1, 2011, the cap reverts back to 30%.
The highlights of the New Guidelines are as follows:
Condominium project approval is not required for condominiums comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
Until December 31, 2010, at least 30% pre-sale level must be reached before any FHA mortgage can be granted on any unit. After 12/31/10, 50% pre-sale level must be reached.
50% owner occupancy rate for the entire project.
No more than 15% of unit owners can be delinquent (over 30 days late) on their condominium fees.
Capital reserve funding: The reserve study requirement has been eliminated, along with the requirement of at least 60% of the fully funded reserves. The new requirement requires merely that at least 10% of the association’s annual budget be set aside for reserves.
Budget review: Lenders must review the condominium budget to determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
No more than 25% of space allocated to commercial use.
No more than 10% of units held by a single investor.
The 1-year waiting period for conversion condominiums is eliminated.
Unit owners must obtain individual HO-6 insurance policies if the master policy doesn’t cover unit interiors.
Fidelity insurance must be obtained for 20+ unit projects.
Re-certification required every 2 years.
Transition Strategy:
FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
Projects that received approval between October 1, 2008 and December 7, 2009, will be “grandfathered” and will have to follow the new guidelines’ recertification process (recertification required every two years).
Analysis:
Although the condominium association and mortgage lobby were successful in watering down some the more onerous requirements, the new revised guidelines will still represent a major change in how lenders underwrite condominium mortgages. Lenders will have to perform much more extensive due diligence on condominium projects than before.
The new guidelines will also force existing condominium associations to really get their acts together, especially with their unpaid condominium fees, budgets, insurance and capital reserve accounts. FHA mortgage programs are becoming the first choice for first time home buyers, and condominium units are particularly suitable for first timers. I have already seen situations where condominium trustees feel no obligation to comply with FHA (and Fannie Mae) guidelines in connection with a proposal sale of a unit, and it is not a good situation. Condominium trustees and association can certainly open themselves up to liability if they don’t cooperate and maintain the marketability of the units which they govern. Trustees owe unit owners a fiduciary obligation to get their associations in compliance with all new FHA/FNMA guidelines, in my opinion.
For condominium associations, the Community Associations Institute has published this helpful “Head’s Up” and FAQ.
New, sweeping changes regulating how lenders, closing attorneys and title companies disclose loan and closing costs are set to go into effect January 1, 2010. The new regulations are part of a long awaited reform to the 30 year old Real Estate Settlement Practices Act known as RESPA aimed at providing greater transparency and fostering better consumer choice in loan and closing costs. The changes are so significant that HUD recently took the unusual step of giving lenders a 120 day reprieve in enforcing the new regulations.
The major components of the new RESPA reform are the new and substantially revised Good Faith Estimate (GFE), in which lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement, which is a detailed financial breakdown of the entire real estate transaction signed at closing.
Highlights of the new changes include:
Borrowers must receive a standard GFE disclosing key loan terms, including the loan’s terms; whether the interest rate is fixed or otherwise; any prepayment penalties and/or balloon payments; and total closing costs.
Lenders must provide borrowers with a standard origination charge for the loan which must include all points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees
Lenders have the option of providing borrowers with a list of approved service providers such as closing attorneys and title insurance companies.
A tolerance range has been specified for various categories of loan/closing costs to prevent unnecessary escalation of promised vs. actual charges.
Fees quoted for lender origination charge cannot change.
Fees for title and closing costs where the lender selects the provider or where the borrower selects the provider from the lender’s approved list cannot change by more than 10%.
Fees that borrowers can shop for themselves can increase (or decrease) by any amount.
The final page of the GFE contains worksheet-like charges to compare different loans and terms that the borrower can use to shop pricing.
Controversial lender payments to mortgage brokers, known as yield-spread premiums, must be disclosed in a standard manner.
The charges quoted on the GFE are then carried over to the HUD-1 Settlement Statement to ensure that the prescribed tolerances are met.
I think that overall the changes will provide consumers with greater disclosure and transparency of the myriad loan closing fees and costs in a typical real estate purchase. It also creates an incentive for lenders to assemble a competitively priced team of preferred settlement service providers, so it can guarantee to its customers that the price of the preferred vendors’ settlement services will never increase by more than 10% at closing. If borrowers aren’t happy with that, they are free to shop and find a better deal themselves.
I plan to do a series of upcoming posts on this important RESPA reform, highlighting the salient sections of the new GFE and HUD-1. As always, contact Richard Vetstein with any questions.
With an eye on the “volatility” of the condo market, the Federal Housing Administration (FHA) has backed off some of the stingy new rules for condominium lending set to be implemented Dec. 7.
After a meeting with the Mortgage Bankers Association last week, the FHA made the following changes to its June 12 condominium guidance letter in a new letter dated Nov. 6:
Spot loan approvals can continue until Feb. 1, 2010.
The FHA will allow a 50 % concentration of FHA loans – up from 30 %- in condominium buildings, and well-qualified buildings can have up to 100 %.
A 50 % owner-occupancy requirement for new condo projects.
The pre-sale requirement has been reduced to 30 % of new projects.
Reserve study requirement eliminated. Condominium budget must provide for funding reserve account for at least 10% of operating budget
The original implementation date for new condo rules was Nov. 1, but that date was pushed back to Dec. 7. The above rules, except the spot loan approval, are all labeled as “temporary,” effective through Dec. 30 – although the FHA reserves the right to extend that date.
Rona Fischman, a buyer’s agent and co-author of Boston.com’s Real Estate Now Blog asked me to answer a couple of questions regarding condominiums on her Boston.com blog which I’ve reprinted here:
Is an individual unit owner liable if someone gets hurt in the condominium’s common areas?
The answer is most likely not. This is good lead in to the concept of “common areas.” When someone buys a condominium unit, they also obtain an undivided share of the condominium’s common areas and facilities. Common areas typically include obvious things such as building entrances and exits, lobbies, interior stairways, pools and workout rooms. They also include not so obvious areas such as the space between adjoining units, telecommunication wires, and the roof. As outlined in the “master deed,” each unit owner “owns” an undivided share (expressed as a percentage) of all the common areas. But the condominium association has responsibility over managing and maintaining the common areas. Recognizing that unit owners have very little control over common areas, the Massachusetts Condominium Act provides that only the condominium association can be sued for claims related to common areas. The condominium association should have a master liability insurance policy in place in case anyone gets injured on common area property. If however, the claim is so substantial that all common funds, property and insurance proceeds have been exhausted to pay the claim, individual unit owners could be held liable for the balance due, if any, but only up to their respective percentage interest in the condominium. Now, if your unit has a private deck or porch (which is not a common area) with a faulty railing, you could be held responsible if someone fell. For all these reasons, unit owners should absolutely obtain an “HO-6” policy for their own liability and an umbrella policy on top of that.
I own a condominium unit and rent it out to students. Am I responsible for my tenant’s noise and disturbance problems?
The answer is yes. While a precise response would depend on the provisions of the condominium’s bylaws, typically, a unit owner is responsible for the actions of tenants. Most often, a condominium’s bylaws and house rules are binding on unit owners, resident family members and tenants. If a tenant violates a house rule — by making excessive noise — the unit owner is responsible for all consequences. The condominium association can require the unit owner to evict the tenant; if the unit owner fails or refuses, the condominium association may be able to take separate legal action against the owner and levy stiff fines. If the bylaws provide, the unit owner may be responsible for reimbursing the condo for legal fees and other expenses incurred in connection with his tenant’s eviction. Disgruntled unit owners can also pursue “nuisance” claims against unit owners who rent to noisy tenants. This is a tricky issue with an absentee unit owner who cannot verify the nature of the complaints. Surely, however, renting to noisy tenants will earn you no favors with your fellow unit owners.
Condominium Living 101
My advice to folks considering purchasing a condominium is to recognize that you are buying into a rather unique form of ownership and community. You will be giving up certain rights taken for granted in single family dwelling life — the right to absolute silence, privacy, and control over all aspects of the property — in exchange for perhaps more amenities, convenience, less maintenance, and better location and price. In some cases, you will also be entering into the uniquely democratic (or in some condos, totalitarian) form of governance, rife with politics, fighting and name-calling–think that Seinfeld episode down at the Del Boca Vista Condos. But seriously, the majority of condominiums are well run. But before you buy, it’s imperative that you and your real estate attorney thoroughly review the condominium documents and budget to ensure you’re not buying into a Seinfeld-esque nightmare.
Under revised guidelines which were to be effective October 1, 2009 but now delayed until November 2, 2009, the Federal Housing Administration (FHA) is implementing a new stricter approval process for condominiums to be eligible for FHA financing. The guidelines are very similar to the new Fannie Mae regulations issued earlier in the year. Some “highlights” of the new regulations include that all FHA approved condominium projects have at least a 50% level of owner occupancy or sell out, no more than a 15% condo fee delinquency rate and a capital reserve study, among other requirements. There is also a little known requirement for an affirmative action housing plan for new construction and conversions. The FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers’ ability to obtain FHA mortgages for condominium units.
For those who don’t know, FHA is a government program designed to help more people buy homes, and more borrowers will qualify with FHA financing than with conventional. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.
To obtain a FHA mortgage on a condominium, the project must be FHA approved. Prior to these changes, there were two ways a condominium could be FHA approved: (1) full project approval, and (2) “spot” approval. Full project approval means that FHA has already done the approval on the entire condominium. Spot approvals were performed on non-FHA approved projects on a loan by loan basis, and were a way to make FHA loans available to home buyers in well run condo projects even if they haven’t gone through the full approval process.
No More Spot Approvals
Under the new guidelines, the popular spot approval process will no longer be available and will be replaced with an entirely new process called Direct Endorsement Lender Review and Approval Process (DELRA). FHA claims the DELRA process is more uniform and streamlined that the former spot loan approval process, but that remains to be seen. The good thing is that lenders will retain the ability, like the former spot approval process, to underwrite FHA loans on non-FHA approved projects, albeit with tighter guidelines.
The new regulations also limit the duration of full project approvals to two years. Thus, even approved condominiums must re-certify every 2 years.
New Project Eligibility Guidelines
Under the new project eligibility requirements, all condominiums (consisting of 2 or more units) must meet the following requirements:
At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 % of the number of presold units (the minimum pre-sale requirement of 50 percent still applies).
Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
At least 50% of the total units must be sold prior to endorsement of any mortgage on a unit. Valid pre-sales include an executed sales agreement and evidence that a lender is willing to make the loan.
No more than 15% of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
No more than 25% of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
Reserve Study – a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed. The regulations fail to define what is “adequate,” however, guidance may be found in the new Fannie Mae/Freddie Mac condominium guidelines which mandate at least 10% of annual operating budget in reserves.
No more than 10% of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100% complete; and only one unit can be conveyed to non-owner occupants.
Rights of first refusal are permitted unless they violate discriminatory conduct under the Fair Housing Act.
Buried in the fine print is a requirement for an affirmative action-type housing plan. For both new construction and conversions, if the developer intends to market 5 or more units within the next 12 months with FHA mortgage insurance, an Affirmative Fair Housing Marketing Plan (AFHMP) or a Voluntary Affirmative Marketing Agreement (VAMA) must be in place. An affirmative fair housing marketing plan requires that the racial, socioeconomic, and ethnic composition of the condominium residents closely mirror that of the neighboring area, to the greatest extent possible. Most new condominiums don’t have these in place.
Click here for the new FHA condominium guidelines. You can look to see whether a condominium is approved on the HUD Homes & Communities website located here. Here is the FHA Condominium Mortgage webpage.
The Impact: More Work For Lenders, Condominium Associations/Managers And Attorneys
I expect FHA lenders will approach condominium association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with FHA (and Fannie Mae) legal requirements. If a condominium is not on the FHA-approved list, or has lost its approval, condominium associations should consider applying for approval (or re-approval). Reportedly, FHA/HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Also keep in mind that the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions.
Our office is well equipped to assist lenders and buyers with FHA loan compliance issues as we have recently issued opinion letters and certifications under the similar Fannie Mae condominium regulations. Contact [email protected] for more information.
As a follow up to my post on the new FHA condominium regulations, I received word from my friend Seth Wills at XLT Property Management, that the Community Associations Institute — the leading condominium and homeowner’s association trade group — recently sent a bulletin to its members, railing against the new FHA and Fannie Mae regulations as overly onerous and hurtful to the real estate market. CAI’s memo states:
CAI believes the new regulations would be a serious burden for condominium associations, and lead to market confusion that could hinder the housing and economic recovery. Under the proposed regulations, all condominiums previously approved for FHA financing would have to be reapproved or FHA financing would not be available. Also, instead of FHA staff reviewing and underwriting condominium projects, FHA would follow Fannie Mae and Freddie Mac by allowing lenders to review and underwrite these projects and certify compliance to FHA. This is the same system that resulted in the current mortgage default crisis. Furthermore, condominium boards (and management) would be asked to provide legal documents, contracts, plans, insurance coverage, pre-sale and owner occupancy percentages and other documentation to lenders performing the underwriting reviews. Condominium associations would also be required to compile, maintain and provide the necessary documentation and information requiring them to develop and implement new procedures — adding significantly to the workload of community managers and condominium boards.
CAI’s position is not surprising given the spat of recent, increased government intervention and regulation affecting condominium and HOA governance. CAI makes a good point with respect to the agencies’ failure to coordinate their regulatory policies:
CAI believes it is essential that these agencies coordinate their actions. These agencies are all essential to mortgage financing and the housing market. Different requirements create confusion for lenders, borrowers, associations and the general public. Such confusion can only slow the recovery of the housing market and the economy in general.
The FHA regulations are set to go into effect November 2. We’ll see if CAI’s promised lobbying push this next month has any effect.
The first step in purchasing or selling Massachusetts residential real estate is the presentation and acceptance of an Offer To Purchase. Most often, the buyers’ real estate broker prepares the offer to purchase on a pre-printed Greater Boston Real Estate Board standard form and presents it to the seller for review, modification, and acceptance. Attorneys are often not involved in the offer stage. However, in light of the legal significance of a signed offer and recent litigation over offers, buyers (and their brokers) and sellers may be wise to consult an attorney to review the offer.
An Accepted & Signed Offer Is A Binding Contract
Many sellers (and their brokers) are under the misconception that the offer to purchase is merely a formality, and that a binding contract is formed only when the parties sign the more extensive purchase and sale agreement. This is not true. Under established Massachusetts case law, a signed standard form offer to purchase is a binding and enforceable contract to sell real estate even if the offer is subject to the signing of a more comprehensive purchase and sale agreement. So if a seller signs and accepts an offer and later gets a better deal, I wouldn’t advise the seller to attempt to walk away from the original deal. Armed with a signed offer, buyers can sue for specific performance, and record a “lis pendens,” or notice of claim, in the registry of deeds against the property which will effectively prevent its sale until the litigation is resolved. I’ve handled many of these types of cases, and buyers definitely have the upper hand given the current state of the law.
There have also been recent court rulings holding that both email and text may constitute an enforceable contract even where no formal offer has been signed by both parties.
In some cases, the seller may not desire to be contractually bound by the acceptance of an offer to purchase while their property is taken off the market. In that case, safe harbor language can be drafted to specify the limited nature of the obligations created by the accepted offer. This is rather unusual, however, in residential transactions.
Home Inspection & Mortgage Contingencies
With the offer to purchase, I always advise buyers and their brokers to use a standard form addendum to address such contingencies as mortgage financing, home inspection, radon, lead paint, and pests. The home inspection and related tests are typically completed before the purchase and sale agreement is signed and any inspection issues are dealt with in the purchase and sale agreement. If they are not, there is an inspection contingency added to the P&S. See my post on purchase and sales agreements for that discussion.
The mortgage contingency is likewise critical. With mortgage loans harder to underwrite and approve, we are seeing loan commitment deadlines extended out for at least 30-45 days from the signing of the purchase and sale agreement. Always consult your mortgage lender before making an offer to see how much time they will need to process and approval your loan. The loan commitment deadline is one, if not the most, important deadlines in the contract documents.
In order to help finance the acquisition of said premises, the BUYER shall apply for a conventional bank or other institutional mortgage loan of $[proposed loan amount] at prevailing rates, terms and conditions. If despite the BUYER’S diligent efforts, a commitment for such a loan cannot be obtained on or before [30-45 days from signing of purchase-sale agreement], the BUYER may terminate this agreement by written notice to the SELLER in accordance with the term of the rider, prior to the expiration of such time, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreements shall be void without recourse to the parties hereto. In no event will the BUYER be deemed to have used diligent efforts to obtain such commitment unless the BUYER submits a complete mortgage loan application conforming to the foregoing provisions on or before [2-5 business days from signing of purchase and sale agreement].
Any time the parties agree to an extension of any deadline in the offer (and the purchase and sale agreement for that matter) make sure it’s in writing.
The Massachusetts Purchase and Sale Agreement Is Anything But “Standard”
Home buyers sign a never ending pile of legal documents to purchase a home. But arguably the most important document in the entire transaction is the Massachusetts purchase and sale agreement. The purchase and sale agreement is signed after the Offer to Purchase is executed, and spells out the parties’ responsibilities during the interim period when the property is taken off the market and the closing.
In Massachusetts, the form most often used is the so-called standard form agreement supplied by the Greater Boston Real Estate Board or one modeled very closely to this form. (Due to copyright laws, we cannot embed the standard form agreement — contact my office if you need assistance with drafting a purchase and sale agreement). The “standard” form purchase and sale agreement is, however, far from standard, especially for buyers. In fact, the standard form is very much slanted in favor of the seller, and the playing field must be “leveled” to protect the buyer’s interests.
This is why it’s imperative that home buyers and sellers alike retain a Massachusetts real estate attorney to modify the “standard” form purchase and sale agreement in order to best protect all parties’ rights and remedies, and customize the agreement to the particular aspects of the transaction. This is typically done through a “rider” to the purchase and sales agreement. Often, the buyers’ attorney and the sellers’ attorney will attached two different riders to the agreement.
I’ll outline a few common issues not addressed adequately in the “standard” purchase and sale agreement. (Most of these are from the buyer’s perspective).
Mortgage Contingency
The “standard” purchase and sale agreement does provide a basic mortgage contingency which gives the buyer the option of terminating the agreement if mortgage financing falls through. However, for a buyer, the more specific you are in terms of interest rate, points, name of lending institution and definition of “diligent efforts,” the better. Buyers’ counsel should specify that the buyer will not be required to apply to more than one institutional lender currently making mortgage loans of the type sought by the buyer and that the buyer may terminate the purchase and sale agreement unless the buyer obtains a firm, written commitment for a mortgage loan. Here is a sample rider provision:
MODIFICATION TO PARAGRAPH 26: Application to one such bank or mortgage lender by such date shall constitute “diligent efforts.” If the written loan commitment contains terms and conditions that are beyond BUYER’S reasonable ability to control or achieve, or if the commitment requires BUYER to encumber property other than the subject property, BUYER may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto.
Home Inspection/Repairs
Typically, buyers complete the home inspection process prior to the signing of the purchase and sale agreement, and any inspection contingency provision is deleted from the purchase and sale agreement. What happens if the inspection results are not ready before the P&S signing deadline or if the seller has agreed to perform repairs prior to the closing or give a credit at closing? In this case, a home inspection contingency clause should be added back to the agreement, and any seller repairs or closing credits should be meticulously detailed in the rider.
Septic Systems/Title V
If the home is serviced by an on-site sewage disposal system otherwise known as a septic system, the Massachusetts Septic System Regulations known as Title V requires the inspection of the system within 2 years of the sale of the home. Failed septic systems can cost many thousands of dollars to repair or replace. Thus, buyers would look to be released from the agreement if the septic system fails inspection. Alternatively, buyers could be given the option to close if the seller can repair the septic system during an agreed upon time period, provided that the buyers do not lose their mortgage rate lock.
Radon Gas
Radon is a naturally occurring radioactive gas. The ground produces the gas through the normal decay of uranium and radium. As it decays, radon produces new radioactive elements called radon daughters or decay products which scientists have proven to cause lung cancer. Radon testing should be performed by buyers during the home inspection process. Elevated levels of radon (above 4.0 picoCuries per liter (pCi/l) can be treated through radon remediation systems. The purchase and sale agreement should provide for a radon testing contingency and the buyers’ ability to terminate the agreement if elevated radon levels are found, or the option of having the sellers pay for a radon remediation system.
Lead Paint
Under the Massachusetts Lead Paint Law, buyers of property are entitled to have the property inspected for the presence of lead paint. (Sellers are not required to remove lead paint in a sale situation). Because the abatement of lead paint can be costly, buyers typically look for a right to terminate the purchase and sale agreement if lead paint exists and the abatement/removal of it exceeds a certain dollar threshold. Here is an example of a provision added to the standard form:
LEAD PAINT. Seller acknowledges that the Buyers have a child under six (6) years of age who will live in the premises. In accordance with Massachusetts General Laws, Chapter 111, section 197A, as the premises was constructed prior to 1978, Buyer may have the premises inspected for the presence of lead paint which inspection shall be completed within ten (10) days after the execution of this Agreement, unless extended in writing by the parties. If the inspection reveals the presence of lead paint, the abatement and/or removal of which will cost $2,000 or more, then Buyer may terminate this agreement, whereupon any payments made under this agreement shall be forthwith refunded and all other obligations of the parties hereto shall cease and this agreement shall be void without recourse to the parties hereto. Any lead paint removal or abatement shall be Buyers’ responsibility.
Access
When my wife and I signed the Offer to Purchase on our house, she couldn’t wait to get in there with her tape measure, paint chips and fabric swatches. Oftentimes overlooked, but a cause of friction is buyers’ ability to access the house prior to the closing. To avoid such friction, an access clause should be added to the purchase and sale agreement giving the buyer reasonable access at reasonable time with advance notice to the sellers–it’s still their house after all.
These are just a few of the issues not adequately addressed by the “standard” form purchase and sale agreement. There are many more.
_________________________________________ Richard D. Vetstein, Esq. is a nationally recognized real estate attorney, and has handled thousands of Massachusetts real estate transactions. He can be reached via email at [email protected].
Recent Fannie Mae (FNMA) condominium lending regulations are beginning to live up to the hype as having an onerous impact on condominium sales and project development. The changes, made in January 2009, were part of an effort by mortgage giants Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.
Here is a brief overview of the Fannie Mae condo guideline changes:
For new construction and newly converted condominium developments, 70% of the units must be pre-sold (closed or under contract). This guideline is being increased from 51%. This is the real Catch-22. Fannie Mae won’t approve condominium mortgages unless 70% of the units are sold, but a developer cannot sell 70% of the units without buyers being able to obtain conventional Fannie Mae compliant mortgages. Buyers who run into problems here are being forced to get loans from small local banks who hold their own mortgages and are not bound by the FNMA guidelines.
No more than 15% of condominium units within a single project can be more than 30 days delinquent on condo fees. This is an existing guideline that is now being applied to new condominium projects. The requirement was also changed from being 15% of the total fee payments to 15% of total units.
Fidelity insurance will be required for condominiums with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condominiums.
Borrowers must now obtain an HO-6 condominium unit owners insurance policy unless the condominium master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condominium owners policy, known as an HO-6 policy, typically covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider. Click here for a more extensive post on HO-6 policies.
No more than 10% of a project can be owned by a single entity. Apparently, this was to keep the so-called “vulture buyers” from taking over project.
No more than 20% of a project can consist of non-residential space. The new guidelines therefore severely impact most mixed commercial-residential use projects, a highly popular development scheme.
The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Many older condominium associations keep woefully inadequate reserves and operating budgets, so they are non-compliant.
No pending litigation involving the structural soundness, safety or habitability of the condominium project. Fannie Mae underwriters will reject financing if the condominium association is involved in litigation over the construction of the project. I’ve written about this more extensively here. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.
Fannie Mae and Freddie Mac have also boosted fees on mortgages for condominium units. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie Mae has said it will drop that fee in August for cooperative apartments and detached condos.
According to a Fannie Mae, the guidelines can be modified for condominium projects on a case-by-case basis. Therefore, these guidelines may not apply to all condo projects.
Certainly, the revised guidelines are negatively affecting condominium buyers’ ability to obtain conventional loans for either a new or established condominium if the project does not conform. Most notably, the changes are dramatically affecting new developments, especially in hard hit areas such as Florida and California.
Fannie Mae has already approved a number of projects. Click here for the full list of FNMA approved projects.
Through discussions with some fellow Massachusetts real estate professionals, the impact here in the Bay State is not as bad as some of the harder hit states, but it’s proving to be a major thorn in many transactions. Real estate attorneys on both sides of the table are working hard to get existing condominium developments in compliance with the new regulations.
Rep. Barney Frank (D-Mass.), who ironically spent the last year lambasting Fannie Mae for its questionable lending practices, is now calling for Fannie Mae to relax these guidelines. We’ll see what happens in D.C., and keep you posted on any changes coming down the pipeline.
Update: Since I posted this article, I’ve been retained several times to issue attorney opinion letters certifying to a lender that a particular condominium project is in compliance with the new FNMA regulations. If you are in need of such an opinion letter, please contact Richard Vetstein at [email protected].
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
“Walls In” Condo Unit Coverage Required By Many Lenders
