Fannie Mae & Freddie Mac are two of the biggest players in the mortgage market, particularly the secondary mortgage market, where mortgages are bought and sold after they have been originated. This article will look at a brief history of Fannie & Freddie and the new condominium questionnaire requirements. We will also go over some best practices for board members and the pros and cons of filling out the questionnaire vs. opting out.
A Brief History
Fannie Mae was created in 1938 as part of the National Housing Act, and Freddie Mac was created in 1970 as a result of the Secondary Mortgage Market Enhancement Act. Both Fannie Mae and Freddie Mac buy mortgages from lenders and then either hold them in their portfolios or sell them to investors to provide liquidity, stability, and affordability to the mortgage market. Both entities are government-sponsored enterprises (GSEs), which means that they're backed by the full faith and credit of the US government.
The New Questionnaire
In January 2022, Freddie Mac & Fannie Mae came out with a new condominium questionnaire (or the "Condominium Supplement") that is filled out for loans obtained to purchase condos.
Why a new questionnaire? Some of the reasoning can be traced to the Champlain Tower collapse, which occurred in Surfside, Florida, in 2021. The post-collapse investigation revealed that the condominium building had significant deferred maintenance, which lenders find problematic.
To protect themselves from purchasing loans for units in potentially unstable or dangerous condominium buildings, Fannie & Freddie decided to request more information on condo questionnaires, mainly information related to maintenance and community financials.
So, what are some of the new Fannie & Freddie requirements for condominiums? For one, at least 10% of the association's annual income must be placed into a reserve account, and the budget must reflect such. Why do they care about your reserve accounts? Again, this goes back to the deferred maintenance and safety issues it may cause. If a disaster strikes, natural or otherwise, lenders want to ensure that the association has been financially responsible and has set aside funds to deal with significant repairs.
Though filling out a questionnaire may sound easy enough, Fannie & Freddie will want to see some of your association's documents before determining if units in your condo building(s) are eligible for their loans.
Some examples of supplemental documentation include:
- The declaration, CC&Rs, or master deed
- Financial statements and budgets
- Reserve studies
- Inspection and engineer reports
- Meeting minutes
They may also want to know things like when the building was last inspected by a professional, if your board is aware of any structural issues, and when you last had a reserve study
(hint: they want to see one less than three years old).
By now, you're probably asking, "Do board members have to fill this out?". Unfortunately, there isn't a right or wrong answer to that as it depends on several factors, including what kind of risk you're willing to take for the association.
On the one hand, if you choose to fill out the questionnaire but make a mistake, you could be exposing current owners to liability. But, on the other hand, if you don't fill it out, the condo may be ineligible for mortgage insurance from Freddie or Fannie. Therefore, you're "blacklisting" your community in the eyes of Fannie and Freddie as they keep a database of projects that do not comply with their standards.
Why does that matter? If your community isn't Fannie/Freddie eligible, you may be alienating some homebuyers, making it more difficult for your current owners to sell their units. As you can see, there is a risk associated with either decision, so you'll have to weigh the pros and cons before deciding what's best for your association – potentially exposing it to liability or shrinking the pool of potential buyers. But remember – your duty as a board member is to current owners, not future ones.
Best Practices for Filling out the Questionnaire
If you decide to fill out the Fannie/Freddie questionnaire, there are some best practices board members should employ.
- Rely on the professionals! You're perfectly within your right (in fact, it's part of your fiduciary duty) to defer to architects, engineers, etc., when it comes to questions regarding the structure itself and safety concerns.
- If you don't know an answer to something, say that. DON'T GUESS.
- Even if you are 99.9% sure that a response is accurate, it's ok (even advisable) to begin your answers with "To the best of the board's knowledge…."
- You have the option to have an engineering or reserve study done and provide the lender with that report – they can then do with that information as they please regarding the questionnaire.
Can't my community manager fill out the questionnaire for me? Unfortunately, no. Management companies do not have the answers to many of the questions, and they would also be exposed to liability should a mistake be made. Remember, there is no law stating that your board must fill out the questionnaire. But keep in mind that your job as a board member is to act in the members' best interest. Your management company will use the information the board has provided to complete resale disclosure forms; therefore, you must be sure to notify your manager if anything should change in the future and update the questionnaire accordingly.
Overall, there are more questions than answers brought about by these requirements as they are very new. As a result, the Community Associations Institute has requested that Fannie & Freddie suspend these new requirements
until associations, management companies, and service providers have had time to understand the new requirements and develop efficient ways to produce the necessary documentation that has yet to be decided. So, as of now, the things we've discussed throughout this article are in effect.
If you have questions about the condo questionnaire and what the best options may be for your association, reach out to the professionals – an engineer, attorney, or reserve specialist will be able to help guide you through the process.
Is your community getting the Trusted Guidance it deserves? Reach out to the experts at CAMS today on our website
or at 888.798.2624 to learn more about the fantastic services we offer.
Mike Stonestreet, CMCA, PCAM, AMS, is Founder/Co-Owner of CAMS (Community Association Management Services). CAMS began in 1991 with Stonestreet and a few employees in a small office in Wilmington but has since grown to over 300 employees serving eight regions across North and South Carolina.
His current role at CAMS focuses on mergers and acquisitions, culture alignment and high-level business relationships. Stonestreet is an active member of the NC Chapter of the Community Associations Institute (CAI) and has spent time on their board of directors, serving as the chapter President in 2019.