Best of Brick

Changes by Fannie Mae to prevent another Surfside tragedy mean some NYC buyers will lose access to loans

By Jennifer White Karp  |
December 28, 2021 - 9:30AM

Fannie Mae recently issued new guidance to lenders designed to prevent buyers from purchasing in buildings with low reserve funds to pay for structural repairs, among other risky scenarios. 


Remember the condo tower that collapsed in Surfside, Florida? It's about to have a seismic impact on mortgages for real estate sales in New York City.

That’s because Fannie Mae, one of the government-backed entities that buys loans from banks, recently issued new guidance to lenders to prevent buyers from purchasing in buildings with low reserve funds to pay for structural repairs, among other risky scenarios. This means some NYC condo and co-op buyers (it’s not clear yet how many) will find it much tougher to get a mortgage starting January 1st.

The sweeping changes are aimed at preventing another tragedy like the one that happened at the Champlain Towers South condo complex—and they are likely to shake up the mortgage industry and dampen NYC real estate sales.

It’s a reality that condo and co-op buyers and sellers are likely unaware of because boards and building managers are only just starting to grapple with the new rules—which are described in a letter to lenders as temporary.

Most significantly, loans for condo or co-op units in buildings with significant deferred maintenance or unsafe conditions will not be “eligible for purchase”—meaning Fannie Mae will not buy these loans back from lenders—a directive that is expected to change lending practices nationwide. With Fannie Mae declining to buy back these loans, major lenders will likely shift their rules as well.

[Editor's note: An earlier version of this post was published this month. We are presenting it again here as part of our winter Best of Brick week.]

New attention to aging infrastructure

In a blog post on the changes, Jodi Horne, director of single-family collateral risk management at Fannie Mae, writes, “The tragedy has focused attention on an emerging challenge: significant deferred maintenance of aging condo and co-op infrastructure.”

To discourage the practice of deferred maintenance (essentially how many buildings fund major work) Fannie Mae will not buy back mortgages from condo or co-op developments that have used an assessment to pay for repairs involving structural integrity until the repairs have been made. The rule is likely to be a shock to many co-op and condo board members.

There are other significant lending guideline changes that are likely to give condo and co-op board members new headaches, including new reviews of current or special assessments, a new status of “unavailable” on the national list of condo projects for buildings that don’t meet eligibility, and a new reserve fund requirement: Buildings will have to keep 10 percent of their operating budget in their reserve fund, a departure from past practices that allowed lenders to obtain a reserve study instead.

The Champlain Tower tragedy occurred three years after building managers had been warned about major structural damage. Repair work was just about to get under way when the collapse occurred, according to The New York Times, which reported that the condo association had taken out a $12 million line of credit to pay for the repairs.

“Many people think the Florida condo collapse was a Florida problem. It’s not,” says Melissa Cohn, regional vice president at William Raveis Mortgage. “We have lots of aging buildings here in New York City.” She expects the move by Fannie Mae is going to “shake up buildings” that don’t have enough reserve funds and are resistant to making contributions to them.

Demand for cheaper conforming loans

The stricter guidelines come just as Fannie and Freddie Mac announce new, higher loan limits up to nearly $1 million, which “could open up potential credit opportunities to buyers who may not have met jumbo financing criteria in the past,” Brittney Baldwin, vice president and loan officer at National Cooperative Bank (a Brick Underground sponsor), previously told Brick.

That juiced up demand, coupled with stricter requirements, will produce headaches for condo and co-op boards—and may result in higher maintenance and common charges for buildings that need to shore up their reserve funds.

“New Yorkers will want access to new loans,” says Orest Tomaselli, president of project review at CondoTek, which provides data on condos for lenders and provides project approval to developers and home owner associations for condo and co-op properties. 

Conforming loans, the ones that are backed by Fannie and Freddie, are easier to qualify for and come with better terms, but he estimates that “90 percent of NYC buildings do not qualify under Fannie’s new guidelines.”

He anticipates “an uproar” from buyers not getting access to financing that may ultimately correct a pervasive, kick-the-can-down-the-road mentality. 

“One of two things is going to happen,” Tomaselli says. “If buildings comply with these new regulations then buyers will have new insight into the future financial obligations. That type of insight has required clairvoyance in the past.

“If buildings don’t comply with these new regulations then owners and buyers may have more limited access to mortgage financing,” he says.

To that point, Habitat Magazine says the move will have a “chilling effect on apartment sales in co-ops and condos with extensive deferred maintenance.”

Operating with little to no reserves

Most buildings operate with practically no reserves—a pervasive practice that is being scrutinized nationwide in the wake of the Florida condo collapse. A report from the Community Associations Institute (CAI) notes that reserve funding for emergency repairs in condos is required in just 11 states, but not in New York. Co-op boards here must periodically set aside reasonable sums for reserves, the report says.

Owners are notoriously averse to increases in common charges and maintenance. They would rather keep their money in their own bank accounts rather than have it sit in the building’s account, preferring buildings to raise funds for repair work as needed through special assessments.

That’s all likely to change now with Fannie Mae’s guidance, which is expected to influence lending nationally—a move so impactful that Tomaselli describes it as “a reckoning.”

But why would Fannie Mae care about buyers getting hit with special assessments in the future? After all, they happen after a buyer has already qualified for a mortgage.

Fannie Mae wants to make sure buyers are financially qualified not just at the point of purchase, but for the full length of the mortgage, Tomaselli explains. Because future assessments are unknown amounts, they could push an owner over the edge financially, causing them to default on their mortgage.

That’s not just a problem for mortgage companies, but for buildings as well. Once you get one foreclosure in a building, “it’s like dominos falling,” Tomaselli says, as other owners or shareholders need to make up for missed monthly payments, putting them at risk of foreclosure as well.

Fannie Mae’s move may seem drastic, but the stakes are high, considering New York’s City’s aging buildings.

“Frankly, nothing is being asked by Fannie Mae that shouldn’t be required in the long-term in some form,” says Jonathan Miller, president and CEO of appraisal firm Miller Samuel. 

“The fallout from Fannie Mae not taking Surfside seriously would be the reduced confidence of buyers of apartments in older high-rise buildings. We should be thinking long-term instead of only short-term here,” he says.



Jennifer White Karp

Managing Editor

Jennifer steers Brick Underground’s editorial coverage of New York City residential real estate and writes articles on market trends and strategies for buyers, sellers, and renters. Jennifer’s 15-year career in New York City real estate journalism includes stints as a writer and editor at The Real Deal and its spinoff publication, Luxury Listings NYC.

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