If the condominium project that you are listing or your buyer is interested in is involved in any pending litigation over construction or its common areas, chances are the borrower will not be able to obtain a conventional loan under newer, strict Fannie Mae condominium lending guidelines.
As you may know, reacting to the condominium market meltdown, Fannie Mae (FNMA) substantially overhauled their condo underwriting rules, effective Jan. 1, 2009. The new rules require a 70% sell out threshold for new construction project, tough rules governing condominium finances, and new insurance requirements, among other tighter standards. The net effect is that condominium lending has gotten substantially more difficult to obtain, and the real estate industry and some lawmakers aren’t happy about it.
Pending Litigation Involving Safety, Structural Soundness or Habitability
The new guidelines exclude condominium financing for “projects in litigation, arbitration and mediation that arises out of a dispute as to safety, structural soundness or habitability.” Fannie Mae underwriters now look closely at any pending litigation involving the condominium, especially concerning its construction and common areas. I’ve seen several loans denied and canceled recently over pending condo litigation, regardless of the merits of the lawsuit. According to the Fannie Mae FAQ, if the litigation is minor and covered by insurance, lenders can ask Fannie for a waiver or exception.
So how do realtors protect themselves here?
- First, prior to signing the purchase and sale agreement, make sure you ask the seller and the listing broker (preferably in writing to create a record) whether there is any pending litigation involving the condominium. Have the seller and their agent fill out your state property disclosure form with that question. Realtors should follow up with the board of trustees or management company. In my home state of Massachusetts, attorneys can obtain access to the state trial court database to search for pending litigation.
- If there is pending litigation, borrowers need to inform their lender, and get an answer whether this will affect the financing. Get a resolution before the loan committment deadline, obviously.
- If you cannot get an answer by the signing of the purchase and sale agreement, have your attorney use a clause in the agreement where the seller certifies there is no pending litigation (and assessments) affecting the condominium.
- Buyers’ attorneys should also use a catch-all Fannie Mae contingency clause which gives the buyer an out if the condominium ultimately is Fannie non-compliant. This should give some additional protection to the buyer, especially where these issues often arise on the eve of closing and after the loan commitment deadline.
Here is my specialized FNMA rider provision:
FNMA/Secondary Mortgage Market Compliance. The Condominium, its insurance coverage, the Unit, and the Condominium Documents (including but not limited to the Master Deed and By-Laws/Trust) shall conform to the most current requirements of Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) or other secondary mortgage market investors, and shall otherwise be acceptable to BUYER’s mortgage lender. If the same does not so comply and Buyer is unable to securing financing, BUYER may, at BUYER’S option, terminate this Agreement by written notice to SELLER, whereupon all deposits made hereunder shall be forthwith refunded, all obligations of the parties hereto shall cease, and this Agreement shall become null and void without further recourse to the parties hereto.
The Pendulum Has Swung The Other Way
What’s troubling about the new rules is that many condominiums are involved in litigation, some of which is meritless or frivolous unit owner suits. A lot of lawsuits are covered by the condominium master insurance policy so there is little risk of real loss. That Fannie Mae would summarily deny financing to these condominiums is disturbing to say the least. Overall, I believe that the pendulum has swung way too far. I wrote about this back when the rules were first implemented, and it’s still true. But it’s the reality. Realtors need to be aware of the situation.
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