Condo questionnaire causing some boards to boycott Fannie, Freddie financing

A Fannie Mae questionnaire boycott of sorts is happening.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | February 26, 2022

Can the condo world live without mortgage giants Fannie Mae and Freddie Mac and their more affordable financing terms?

A fast-developing crisis is hitting condominium association boards and property management firms across the country tasked with filling out “draconian” questions required of HOA property management companies.

In consideration of last year’s Champlain Towers condo collapse that killed 98 people, Fannie and Freddie rightfully want to know if America’s condo complexes have deferred maintenance or structural safety issues. To that end, the agencies on Jan. 1 and Feb. 28 instituted new questionnaires for certain applicants regarding the structural integrity of the condo community and whether any code violations are anticipated.

And now a questionnaire boycott of sorts is happening.

“The questionnaire is draconian. It’s freaking out boards of directors and managers,” said Adrian Adams, founder and managing partner of law firm Adams-Sterling, who advises and represents condo boards.

He said several boards have already decided “do not answer these questionnaires. They don’t even want Fannie and Freddie loans.”

Erik Rivera, president and CEO of Manhattan Pacific Management, manages 60 condo (specific) community associations. “Four to five will probably go the (Fannie, Freddie) boycott route,” said Rivera.

The condo questionnaire, it should be noted, is not applicable for certain associations such as townhouses or planned unit developments, for example. Another exclusion is a single-family neighborhood with a community association.

Beyond the matter of righteous safety matters, other probing questions, such as “Is the HOA/Cooperative Corporation aware of any deficiencies related to the safety, soundness, structural integrity, or habitability of the project’s building(s)?” may be legal traps, of sorts, to deflect future liability away from Fannie and Freddie.

According to the Wall Street Journal, 9% of Fannie’s loans and 7% of Freddie’s loans in 2021 were for condos.

Just last week, Community Associations Institute sent a survey to its condo and co-op boards and managers. Early results from 48 respondents indicate 36.8% of mortgage applicants in their HOAS were denied credit because of the new Fannie, Freddie questionnaire. Separately, 31.5% of borrower closings were delayed, according to survey results. Seven of the 48 HOA respondents were from California.

It’s not clear if these denials were purchase loans or refinance applicants. It’s also not clear what information provided in response to the F and F backed questionnaires caused the loan denials, according to Dawn Bauman, senior vice president of government affairs at CAI.

More than 89% of the survey respondents feared exposure to liability because the questions were beyond their knowledge and expertise. Almost 74% of respondents feared exposure to liability for not answering questions (on behalf of the mortgage applicants). From my view, the perception seems to be if the HOA representative does not answer and the lender denies the loan, then the HOA rep and others may be liable to the borrowers.

It’s very early in this new HOA questionnaire world, but Rivera already knows of one lender denial due to the way the HOA answered.

“When an engineering report is pending, for example, and we respond to the questionnaire as such TBD, sometimes that’s not good enough for the lender,” Rivera told me. “Other questions we refer to the lender to the association attorney and they don’t like that either.”

Fan and Fred have been touting the new questionnaire as optional, not mandatory. I’ve read it on their websites, and I observed it on a webinar featuring Fannie and Freddie condo experts. And they made that claim in a Wall Street Journal article on Feb. 20.

As an alternative, Fan and Fred offer to accept underwriter assertions of several board minutes reviews, engineering report reviews and local government inspector reviews. However, there’s a fat chance any underwriter has the enormous amount of time needed to research (or the expertise) to understand these complicated matters.

And, if the underwriter provides this “good to go” assertion and something was missed or was not addressed at all, then the underwriter’s employing lender may eventually be liable.

Lenders I spoke with literally laughed when I raised this Fan and Fred alternative to the HOA questionnaire.

To be fair, about 50% of the loans we run through Fannie and Freddie’s underwriting engines at my mortgage brokerage shop provide for a limited review. For many lenders, this limited review means a much shorter list of HOA questions. These limited review questions may not include the matter of deferred maintenance. But even that topic is getting murkier by the day as lenders worry about these condo safety concerns.

Mortgage lenders are in the business of making mortgages. Every lender I’ve interviewed (all off the record) about this new HOA issue is hopping mad. They complain Fannie and Freddie are providing little clarity and direction. They are leaving it to subjectivity and underwriter judgment when they receive these wonky HOA responses.

Since Fan and Fred have had a long history of making lenders buy loans back later over sometimes nonsense issues, lenders don’t trust the agencies in the abstract. So, when in doubt, decline the loan. It’s simply not worth the battle or the expense of the buyback.

“Freddie Mac’s requirements are designed to help ensure residential buildings with aging infrastructure are safe for their residents and the condos and co-ops needing critical repairs have a plan to do so,” said a Freddie Mac spokesperson.

Condos typically represent the most affordable homeownership. The biggest losers in this new, temporary HOA format are folks that need more affordable housing, underserved borrowers, minority borrowers and first-time buyers.

It’s obvious the very important safety and maintenance questions could have been posed on the HOAs in a much less threatening way. Taxpayer-owned Fannie and Freddie are on the inside looking out. They think it’s their gold and it’s their rules.

It’s too bad it usually takes a policy crisis for them to pay attention.

“They will likely change (these forms) this summer,” said Robert Nordlund, founder and CEO of Association Reserves who consults with Fannie and Freddie. “They are government entities. They move slowly.”

Fannie and Freddie declined to comment for this column.

Freddie Mac rate news
The 30-year fixed-rate averaged 3.89%, 3 basis points lower than last week. The 15-year fixed-rate averaged 3.14%, down 1 basis point from last week.

The Mortgage Bankers Association reported a monster 13.1% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $647,200 loan, last year’s payment was $331 less than this week’s payment of $3,049.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages without points: A 30-year FHA at 3.5%, a 15-year conventional at 3.25%, a 30-year conventional at 3.875%, a 15-year conventional high balance ($647,201 to $970,800) at 3.125%, a 30-year high balance conventional at 4.375% and a jumbo 30-year purchase, fixed at 3.875%.

Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year adjustable jumbo mortgage, locked for the first 10-years with an interest-only payment at 3.625% without points.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.