Condo Media - March 2022 - 33

WHAT IS THE SURFSIDE
AFTERMATH ON LENDING?
As we have learned in the months
following the collapse, there were
a number of likely contributing
factors to the tragedy including:
long-term degradation of
reinforced concrete structural
support in the ground-level parking
garage under the housing units
due to water penetration and
corrosion of the reinforcing steel;
the association's alleged failure
to maintain adequate operating
and reserve accounts in the face of
an estimated $15 million critical
structural repair; and the association
board's alleged failure to levy
special assessments to make such
repairs feasible.
In light of this situation,
the mortgage lending industry
has already reacted in ways that
will have immediate impacts
on condominium management.
Fannie Mae and Freddie Mac,
the federal government sanctioned
companies that buy mortgages
from banks, have already
updated the information they will
require from associations as part
of their condominium questionnaires
submitted to associations
in conjunction with unit sales or
refinancing. Fannie Mae's new
rules went into effect on January
1, 2022, and at the time of this
writing, Freddie Mac's are scheduled
to go into effect on February
28, 2022. Moreover, because these
entities buy loans directly from
financial institutes, the practical
impact will be that most banks
will adopt these new requirements
as well, which will apply to all
projects with five or more units.
In fact, many have already done so.
On December 15, 2021, Fannie
Mae and Freddie Mac released a
joint updated Condominium
Project Questionnaire, adding a
new addendum to the questionnaire
to gather information
required under these new requirements.
Questions added, relevant
to the issue of deferred maintenance,
include the following:
l When was the last building inspection
by a licensed architect, licensed engineer,
or any other building inspector?
l Did the last inspection have any findings
related to the safety, soundness,
structural integrity, or habitability of
the project's building(s)? If yes, have
the recommended repairs/replacements
been repaired?
l Has the HOA/Cooperative Corporation
had a reserve study completed on
the project within the past three years?
l Are there any current or planned special
assessments owners/shareholders
are obligated to pay? If yes, what is the
purpose of the special assessment?
l What is the total current reserve
account balance?
l Is there any material deferred
maintenance?
HOW SHOULD
ASSOCIATIONS RESPOND?
First and foremost, prior to answering
any condominium questionnaire, we
would advise requiring the parties to the
transaction sign an indemnity and release
agreement. In the context of a sale, this
would be a document signed by the unit
owner(s) and buyer(s). A refinancing
application would be executed by the unit
owner(s). These agreements typically include
language requiring that the parties
release the association from liability arising
out of the nature of the information
provided in the questionnaire.
Second, regardless of the indemnifying
language in any such agreement, associations
must also be careful to ensure
that they are responding to these
questionnaires in a precise manner.
It is logical that an association would
respond with a desire for the loan application
to proceed without issue. An inability
to refinance or close a unit sale can raise
concerns amongst owners and can have
significant impacts on the marketability
(and market value) of units. Nevertheless,
misrepresentations on questionnaire
responses can subject an association to
potential civil liability to the parties to
the transaction.
Finally, in addition to the immediate
response to lenders, associations would
be wise to take a renewed look at their
approach to building maintenance and
consider the following:
1
2
3
4
5
If there has been no recent reserve
study or building analysis (especially
larger projects), begin the process of
securing a professional to perform
the same.
If there has been a recent study,
review any findings and reports to ensure
that there are no urgent action items.
If there are, evaluate financing options.
Begin budgeting for any other relevant
items as dictated by the results of the
study if not already done. Once an association
is on notice of these issues, the risk
of exposure increases for damages arising
out of the areas of concern identified in
the study.
Consider increasing fees and adjusting
the budget to accommodate future
maintenance expenditures. Fee increases
are never popular and often give rise to
the decision to defer maintenance in the
first place. This is a short-term mindset,
which can give rise to much larger fees
and assessments on short notice.
Ensure reserve accounts are adequately
funded. Regardless of the
new lending requirements, Fannie Mae
and Freddie Mac will continue to look
for reserve accounts to contain at least
10 percent of the budget for the project.
The days of deferring needed maintenance
in order to avoid raising common
fees are over. The board has the duty of
maintenance, repair, and replacement.
The board must carry out their duty.
Make a reasonable plan and follow it.
n PATRICK M. AUDLEY,
ESQ. IS AN ASSOCIATE
WITH THE LAW FIRM
MARCUS, ERRICO,
EMMER & BROOKS,
P.C. AND HENRY A.
GOODMAN, ESQ., CCAL
IS A PARTNER WITH
THE FIRM.
March 2022 CONDOMEDIA 33
Condo Media - March 2022

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