Orest Tomaselli of CondoTek on Condo/Co-op Compliance

Orest Tomaselli is President of the Condominium and Cooperative Review Division of CondoTek, Philadelphia, and owner of Strategic Inspections, a national reserve study provider.

As former owner of National Condo Advisors for 13 years, Tomaselli and his team have provided thousands of buildings with Fannie Mae, Freddie Mac, FHA, VA and portfolio project approval. With acquisition of his firm and his new role, CondoTek brings the condo/co-op review process in-house for lenders, developers and clients on lending compliance.

MBA NEWSLINK: What are the main areas lenders must focus on to ensure lending compliance?

Orest Tomaselli

OREST TOMASELLI, CONDOTEK: There are a few key areas within Fannie Mae’s new condo and co-op guidelines that lenders need to focus on. The first and most obvious is whether or not the condominium or co-operative project is even available for Fannie Mae financing. There’s also a new questionnaire that needs to be filled out, which carries a unique set of issues for HOAs. Perhaps most importantly, lenders need to document any deferred maintenance, special assessments, and whether the project has the requisite reserves in place to maintain the property. Basically, lenders need to do a much deeper dive on condominium and co-op housing developments if they hope to sell loans to the GSEs.

NEWSLINK: What is the first step in determining lending compliance for a lender in a condo or co-op property?

TOMASELLI: The very step is clearly defined by Fannie Mae—lenders need to check Condo Project Manager to see if the subject property is listed on the GSE’s new “unavailable” list. If it is, Fannie Mae won’t finance it.

Fannie Mae has really thrown down the gauntlet on this one, and it’s had a major impact already. Two weeks after the guidelines first came out on October 14, there were over 900 properties on Fannie Mae’s list. However, just because a development is not available now doesn’t mean it won’t be available in the future. It may be possible to get a Project Eligibility Review Service approval through Fannie Mae, which is something we help lenders do.

NEWSLINK: Do the new guidelines require additional documentation review?

TOMASELLI: Most definitely. Lenders need to request and review all documentation regarding deferred maintenance, special assessments, recent repairs and improvements, inspection reports, and even HOA meeting minutes. They must also look for past property violations that could compromise the future habitability of the project. The amount of work involved with collecting and reviewing these documents can be daunting, which is why a lot of condo and coop lenders turn to third parties for help.

NEWSLINK: How do the new guidelines impact condo/co-op questionnaires?

TOMASELLI: Fannie Mae has added several new questions to its condo and co-op questionnaires, some of which will trigger issues that will require careful examination by the lender and possibly additional documentation. In fact, there is some information being requested on these questionnaires that condo or coop board members and managers really shouldn’t be answering unless they have the appropriate documents or engineering reports backing them up. We’re finding that a lot of lenders are incorporating Fannie Mae’s questionnaires into their own questionnaires, which may include data points they find most necessary. CondoTek, for example, also has its own questionnaire which weaves in questions from a variety of GSEs and investors.

NEWSLINK: How do the new lending guidelines view Special Assessments and Deferred Maintenance?         

TOMASELLI: The new guidelines place most of the underwriting focus on determining if a development has deferred maintenance or special assessments in place, and if so, what the impacts are for both the borrower financially as well as the habitability of the property. Getting to the bottom of this issue can take significant time and effort, and it involves a lot of paperwork.

For instance, Fannie Mae recommends that lenders review the past six months of the HOA’s meeting minutes for any information about maintenance, improvements, assessments and reserve funding, as well as review of any inspection or engineering reports over the past five years. The presence of special assessments or deferred maintenance doesn’t necessarily disqualify a property for financing. But they must be thoroughly researched and a determination must be made on their impacts.

NEWSLINK: The capital reserve collection has become a major requirement for condo and co-op properties. How does this impact condo and co-op properties and lenders?

TOMASELLI: Every property needs to be reviewed for compliance with Fannie Mae’s new 10% reserve line-item requirement. If a development doesn’t meet the 10% requirement, it’s possible that a reserve study may be used to demonstrate that HOA has planned properly for future maintenance. For years, reserve studies have been used on new housing projects to ensure that HOAs weren’t over- or under-reserving funds for future expenses. However, Fannie Mae has very specific guidance regarding the use of reserve studies, and a project may be ineligible without PERS approval.

What we’ve seen over the years is condo and co-op projects that started out with a 10% reserve line item often abandoned over time. However, the ones that had a reserve study done typically maintained their reserve contributions over time. This is one of those guidelines that we really don’t believe makes much sense, and may be adjusted down the road a bit.

NEWSLINK: How have appraisal requirements changed with the new lending policies?

TOMASELLI: Appraisers were already required to address special assessments and deferred maintenance in their condo and co-op property reports. The new guidelines just take things a step further. For special assessments, for example, appraisers must include the assessment payment plan, the duration of the plan, and what the assessment is being used for. This additional level of detail will require increased scrutiny by lenders.

Admittedly, the new guidelines will be difficult for lenders to comply with, but the spirit behind them is on point. The overwhelming majority of condo and co-op properties in the U.S. are more than 30 years old, and many—just like Champlain Towers in Surfside, Florida—have put off necessary repairs. Frankly, Fannie Mae’s response was the right thing to do. And if lenders need help complying with the new guidelines, it’s not hard to find.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)