MReport June 2022

TheMReport — News and strategies for the evolving mortgage marketplace.

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36 | M R EP O RT FEATURE So, how do lenders ensure these things are accomplished? That will not be easy. But there is a general rule we see emerging that may at least help lenders see the bigger picture. The 70/20/10 Rule of Lending Compliance O n average, our team is involved in the review of upwards of 2,000 condominium and co-op properties a month. As we perform these reviews, there are a few clear distinctions that are emerging. Approximately 70% of condo and co-op properties that we review are compliant with the new lending guidelines. This 70% share of these properties that are compliant are easily financed, and there are abundant resources for Fannie Mae, Freddie Mac, and portfolio jumbo mortgage financing available for them. Being compliant means that these properties meet several key criteria, which includes establish- ing a reserve account that has a substantial amount of capital to pay for future repairs and replace- ment of common area mechanical and structural components. Compliant properties also have a reserve study or an engineer- ing study performed in the last 36 months that is available for review. This ensures board members and property manag- ers are informed of the condition of different components, that reserves are appropriately being collected in an annual operating budget, and that future repair and replacement costs are being collected to avoid future special assessments. Compliant properties also have a baseline question- naire that has been completed for the property which addresses the new questions that the GSEs require to be answered, either by attaching an updated reserve study, engineers report, or equiva- lent for review. Approximately 20% of the condo and co-op properties that we review are not initially compliant with the new lending guidelines, but could be made compliant with a little effort. Generally speaking, these properties meet some of the criteria outlined in the new guidelines, but require additional information to be reviewed to determine warrantability. For example, properties that fall into this category may lack confirmation that a 10% reserve line item appears in the operat- ing budget and the condo/co-op has amassed capital for future repair of structural or mechanical components. They may also have a special assessment in place for a large mechanical or structural repair, but the work has already been completed. In some cases, the condo or co-op board does not want to answer questions involving deferred maintenance on structural and mechanical components on the question- naire, but they have an engineer's report, and a reserve study that they provide that may help clear things up. Overall, these 20% of all condo and co-op properties have more limited access to mortgage financing and require additional oversight or compliance to be performed. Access to portfolio mortgage financing is often pos- sible, but access to conforming lending is more challenging. The final 10% of the condo and co-op properties we review are noncompliant with the new lending guidelines and have serious issues that will prevent almost all lending on the property unless the issues are rectified. For example, the property may have an operating budget that has no reserve contribution listed, or there is a reserve account, but it has very minimal capital accrued. There may be a special assessment in place to fund a large me- chanical or structural component repair, but the repair has not yet been completed. Some of the more serious issues in these properties include multiple components that have not been adequately maintained or replaced and are suffering from deferred maintenance. A property may even have a violation that outlines an unsafe condition that can impact the habitability of the property. For this approximate 10% of reviewed condo/co-op properties, access to mortgage financing is incredibly difficult to obtain, and it is simply impossible to obtain Fannie Mae/Freddie Mac approv- al. Only in unique circumstances can portfolio lending be offered on these types of properties, and when it is, borrowers are typi- cally offered much higher interest rates with much lower LTV's. The Bottom Line A t the end of the day, there is no longer any way for a condo or co-op property to oper- ate without reserving adequate capital for component repairs. If they do not comply with the new guidelines, financing will not be available … period. From now on, buildings must obtain professional evaluations of components, set aside appropriate funds for future capital repairs and complete repairs to components whose maintenance has been delayed or overlooked. For many condo and co-op lenders, the best response to this new reality will be to look for outside expertise to help. Otherwise, we can only hope the new reality created by the GSEs' guidelines—as challenging as they are—will introduce a new era of more transparent, proactive, and safer condo and co-op prop- erties. If it does, the work we all put in will be well worth it. OREST TOMASELLI is President of the Condominium and Cooperative Review Division at CondoTek, and Owner of Strategic Inspections, a national reserve study provider. As the former Owner of National Condo Advisors for the past 13 years, Tomaselli and his team have provided thousands of buildings with Fannie Mae, Freddie Mac, FHA, VA, and portfolio project approval. With the acquisition of his firm, and his new role, CondoTek now brings the condominium and cooperative review process in-house so that its lender, developer, and board clients can have a complete, end-to-end solution for lending compliance. Approximately 20% of the condo and co-op properties that we review are not initially compliant with the new lending guidelines, but could be made compliant with a little effort.

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