In December 2021, Fannie Mae and Freddie Mac—the two government sponsored entities (GSEs) that guarantee most of the mortgages in the United States—added an addendum to their standard Condominium Project Questionnaire. It includes a new section that requires boards and/or property managers to disclose information related to building safety, soundness, structural integrity, and habitability. For that are unfamiliar, the Questionnaire is typically sent to an association when an individual is seeking mortgage financing to purchase or refinance a unit in the respective condominium.
The addendum to the Questionnaire adds twelve primary questions:
- When was the last building inspection by a licensed architect, licensed engineer, or any other building inspector?
- Did the last inspection have any findings related to the safety, soundness, structural integrity, or habitability of the project’s building(s)?
- Is the HOA/Cooperative Corporation aware of any deficiencies related to the safety, soundness, structural integrity, or habitability of the project’s building(s)?
- Are there any outstanding violations of jurisdictional requirements (zoning ordinances, codes, etc.) related to the safety, soundness, structural integrity, or habitability of the project’s building(s)?
- Is it anticipated the project will, in the future, have such violation(s)?
- Does the project have a funding plan for its deferred maintenance components/items to be repaired or replaced?
- Does the project have a schedule for the deferred maintenance components/items to be repaired or replaced?
- Has the HOA/Cooperative Corporation had a reserve study completed on the project within the past 3 years?
- What is the total of the current reserve account balance(s)?
- Are there current special assessments unit owners/cooperative shareholders are obligated to pay?
- Are there any planned special assessments that the unit owners/cooperative shareholders will be obligated to pay?
- Has the HOA obtained any loans to finance improvements or deferred maintenance?
And if any of the answers to the foregoing questions are “yes,” the Questionnaire may ask follow-up questions seeking more detail or information.
The addendum to the Questionnaire is likely a direct response to last year’s condominium collapse in Florida. By adding a section on building safety, soundness, structural integrity, and habitability to the Questionnaire, lenders are essentially tightening the overall eligibility of the project for mortgage financing purposes. Only time will tell the impact this has on the condominium marketplace.
Regardless, in the short-term, boards and property managers will be called on to address these additional items within the Questionnaire. The biggest issues we see at this point are: (1) whether a standard reserve study constitutes a “building inspection by a licensed architect, licensed engineer, or any other building inspector”; and (2) how much information should one provide for the follow-up questions (i.e., presuming any of the answers to the questions above are “yes”).
For the first issue, it probably depends. There are plenty of companies that offer reserve studies and/or employ reserve study “engineers” who are not licensed architects, professional engineers, or building inspectors. For example, if a reserve study is performed by an engineer-in-training (EIT), it is probably not a building inspection by a “licensed engineer.” Boards and property managers should see if the reserve study is signed by an individual with the “professional engineer” or “P.E.” designation, which may also include an embossed stamp by the signature.
The second issue stems from being unsure how to answer some of the questions above. In our opinion, boards and property managers should defer to written reports/scopes whenever possible. For example, if the follow-up question wants to know what repairs/replacements are needed, the association should probably type in “see the attached report/scope of work” versus trying to explain the necessary repairs/replacements. This should mitigate the possibility of providing misleading information related to building safety, soundness, structural integrity, and habitability, which could ultimately preclude someone from obtaining financing at the condominium.
Due to the relatively new and complicated nature of the addendum, many condominium associations are deferring to their attorneys for advice—at least for the initial round of responses. Again, we are unsure how Fannie Mae and Freddie Mac will react to the suggestions above, but this is the conservative approach. In other words, because the addendum to the Questionnaire does not define certain terms (e.g., building inspection, inspector, etc.), providing the actual reports and/or scopes gives Fannie Mae and Freddie Mac the source information for the association’s responses. This way an individual’s attempt to obtain financing is not unintentionally blocked by a misinterpretation of the addendum’s questions.