A friend of mine told me that he lost out on a sale of his condominium unit because his condominium association did not qualify under Fannie Mae guidelines because there was not a line item for a reserve of at least 10%. What is the story with this?

For many years Freddie Mac and Fannie Mae had an underwriting guideline which basically provided that as long as the association had been turned over to the unit owners from the developer for a period of at least two years, there were no restrictions which were otherwise utilized in connection with new developments. However as a result of the mortgage market meltdown and the criticisms levied at Fannie Mae and Freddie Mac, Fannie Mae has rewritten its underwriting guidelines and, with respect condominiums, requires that there be a line item in the budget which requires at least 10% of the amount of the budget to be set aside as a reserve for capital expenditures and replacements. Many condominium associations have healthy reserves and so do not have line items for that kind of reserve. If the association has recently effected major improvements, such as the roofs and siding, they may have minimal reserves set aside in the budget. Other associations use special assessments. So this is a culture change that will leave some buyers and sellers who otherwise are all set to go through the transaction in a lurch because many associations are unaware of this requirement and budgets are generally established once a year and, particularly with larger associations, changing the budget in midstream will create difficulties. In addition to that requirement, Fannie Mae now requires that there be a reserve equal to the amount of the deductible on the master insurance policy which is a brand-new requirement and will not appear in almost any association’s budget. It is unfortunate that with rates being as low as they are that many people who own condominium units will not be able to successfully sell their units or refinance them because of these new requirements.

If you have questions about this or any other real estate matter, please contact Tom Bennett at (617) 531-6574 or tvb@barronstad.com.