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Surfside Condo Prompts Fannie and Freddie to Implement Temporary Lending Requirements

Surfside Condo Prompts Fannie and Freddie to Implement Temporary Lending Requirements

Real-Ativity January 28, 2022 7 hours ago
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Surfside Condo Prompts Fannie and Freddie to Implement Temporary Lending Requirements

On June 24th, 2021, around 1:20 am, the twelve-story Surfside Condo in Miami collapsed, killing 98 people.  The Miami Herald performed an in-depth investigation and noted this horrific event as "one of the deadliest building failures in modern history," also concluding that "the investigation revealed design failures, shoddy construction, damage and neglect that lined up like dominoes to create the perfect conditions for a deadly chain reaction."  In response, on October 13th, 2021, The Federal National Mortgage Association, Fannie Mae, which accounts for around a quarter of the lending power behind U.S. mortgages, announced substantial temporary requirements for lending practices towards condos and co-ops, beginning on January 1st, 2022.

While these new measures are being publicized as temporary, many speculate that they could become permanent.  The new requirements apply to communities with five or more attached units and address the structural integrity of buildings and the association's finances, particularly the reserve funding. The association or management company will need to disclose any information to support compliance regarding these new requirements through an addendum to the condo questionnaire known as form 1076.  If investigations find a project ineligible, a new status called "unavailable" deems a condo or co-op unfundable.

On February 28th, 2022, the Federal Home Loan Mortgage Corporation, or Freddie Mac, is implementing similar guidelines addressed in a Bulletin released December 15th, 2021.  Together, Fannie Mae and Freddie Mac back around half of all mortgage financing in the country.  The expectation is that most private lenders, banks, and financial institutions will follow suit.  Throughout this article, we will go over the changes and discuss the potential effects on the residential real estate market, condo and co-op owners, boards, and property management companies.  We will highlight proactive ways to navigate the new requirements to maintain compliance and avoid being listed as "unavailable."  This conversation is fluid as the ramifications of these changes are still unfolding.

Surfside Condo Tragedy Ignites Changes in Lending

For two heart-wrenching weeks, the world watched and waited with bated breath while rescue crews put their own lives on the line, searching for survivors.  Constructed by architect William Friedman and engineer Sergio Breiterman in 1981, Surfside Condo was flawed from day one.  Friedman and Breiterman had a reputation for doing things in the cheapest, quickest, and easiest way possible.  Regarding structural issues, there were serious concerns noted for decades, particularly with the pool and parking area, which is likely what caused the collapse.  Furthermore, the condo association board had a history of general disorganization.  With concerns over structural defects, many condo owners cut losses early, causing a shuffle of ownership resulting in an unstable administration.

"this is something that despite what happened with the tragedy, the markets on lending and risk management practices were already tightening.  This is not something that was just triggered by this tragedy, it was accelerated."
-Marc Tamres, CEO of HomeRun IQ, in a round table discussion led by AKAM

The Changes & New Requirements
For condo and co-op projects with five or more attached units:

If there are unsafe conditions and/or significant deferred maintenance, a project will not be eligible for purchase, including:

  • A building evacuation of more than a week is necessary to complete repairs.
  • Many significant components need repairs - functioning of main mechanical or structural elements such as foundation, HVAC, plumbing, or roof, to name a few.
  • The necessary maintenance is critical, affecting the habitability, structural soundness, or safety.
  • Routine repairs and maintenance do not apply if it does not affect the overall habitability, safety, soundness, or structural integrity of the project.
  • Any work that would require a special assessment.
  • Documentation required to redeem eligibility include: A passing or satisfactory engineer or inspection report, Certification of Occupancy from a local ordinance, or other verified official documentation that proves there are no habitability concerns regarding safety and structural integrity

10% Budget Reserve Requirement

  • In the past, it was commonplace for boards to differ maintenance and put off Capital budgeting to keep operating costs down. -Now communities will need to draft a reserve budget and have a line on the operating account for reserves.
  • If a project has trouble meeting the 10% in Reserve funds, a lender may submit for an exemption by providing a Reserve Study that shows sufficient responsible management, safe habitability, and budgeting.

Special Assessment Review

  • All special assessments, even if paid in full, will be reviewed.
  • Why did the project need one?  How many in total have there been since the project's beginning?  What are the repayment terms?
  • Documentation is required to prove that the special assessment doesn't have a negative financial or structural impact on the community | Lenders will need to prove the project has sufficient funding for repairs.
  • Examine any special assessment levied because of structural, safety, habitability, or any other serious concerns| All repairs need to be fully completed to be eligible.

Unavailable Status

  • A project deemed ineligible for purchase due to these requirements will be labeled as "unavailable" under the Condo Project Manager program.

Fannie Mae will no longer grant Project Eligibility Waivers (PEWS) for any of the concerns laid out in the new requirements and guidelines above

Loss of Value

The Surfside Condo nightmare put pressure on lenders and local governments to address the lack of due diligence to avoid such tragedies in the plethora of aging condos and coops in Florida and across the United States.  Thus far, Florida has seen around 400 projects labeled ineligible for loans, according to Christina Pappas (president of the Florida Realtors) in an article by the South Florida Sun-Sentinel.  Across the country, around 940 projects are "unavailable."  Expectations are that the number of projects deemed "unavailable" will accelerate rapidly.  Projects "ineligible" for funding by Fannie and Freddie will lose value and negatively affect the local residential real estate market.  Currently, the loan limits for the two national powerhouses in Palm Beach County, Florida, are around $645,000 for a one-unit purchase and over a million dollars for purchases of multi-family dwellings with up to four units.  Not only will condo buyers be unable to purchase within "unavailable" projects, but banks will not allow anyone to refinance in the building.  Owners, boards, and property management teams would be well advised to get ahead of the game.

A Few Tips for Proactive Project Leadership

  • Although it is good to have an Engineer Report, a Reserve Study is likely more helpful.  Here is why: Engineering & Financials need to match up | An engineer report will tell you what needs to be fixed, repaired, or replaced - but it doesn't tell you how much each issue will cost over 30 years, the length of most loans.  A Reserve Study will give a clearer picture of how much everything will cost, taking into consideration the Reserve accounts interest rate and inflation over the next 30 years.  A Reserve Study may not go as in-depth on infrastructure as an engineer report does, but it does note any issues or concerns on common components and areas that need an inspection along with estimates for needed repairs.  *Reserve Studies should be done every three years.
  • Board members need to consistently pay attention to property condition details and financials and clearly communicate concerns with owners.
  • Experts suggest avoiding any special assessments. | In the long run, with inflation at record highs, paying debt service on a capital loan will cost less over time than the inflation on a special assessment.
  • Special assessments flag the project as problematic. | Any carried special assessments should be considered an unfunded liability subtracted from the value of the property.
  • Be prepared to make a statement regarding the infrastructure, financials, reserve funds, and any special assessments or any deferred maintenance.


The tragic Surfside Condo collapse illustrated the severity of the consequences of a lackadaisical approach to infrastructure safety and financials of projects with five or more attached units.  Fannie Mae and Freddie Mac are taking action by imposing temporary requirements on lending to condos and co-ops.   The bottom line is lenders need to minimize any possible risks and obligations for the loan time frame of 30 years.  This is only the beginning.  It is expected that all lenders will follow Fannie and Freddie's lead, and changes in local legislation (Florida's proposed laws) across the country will begin to take shape.  Owners, boards, and property management teams would be wise to take a proactive approach to keep their projects safe, fundable, and of value.

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