The Federal Housing Finance Authority (FHFA) is considering an increase to radon sampling requirements for Fannie Mae and Freddie Mac multifamily loans in accordance with the EPA’s Voluntary Consensus Standards for Radon Testing and Mitigation. On July 20th, FHFA held a listening meeting to receive input and feedback on issues related to multifamily testing and mitigation to inform the FHFA and the Enterprises’ decision making. Meeting attendees included representatives from the medical field; health advocacy groups such as the American Lung Association and Cancer Survivors Against Radon; government agencies such as HUD, CDC, and EPA; radon laboratories, various lenders and consultants; and representatives from multifamily housing organizations such as Mortgage Bankers Association (MBA) and National Multifamily Housing Council (NMHC). As a leading provider of due diligence services for Fannie Mae and Freddie Mac lenders, Partner Engineering and Science attended, represented by Chief Strategy Officer Bill Tryon. Tryon delivered a statement regarding the impact of proposed changes on the multifamily due diligence process based on Partner’s experience and insight to the costs and timing associated with testing and mitigation in compliance with EPA recommended standards.
Radon Testing in Multifamily Properties
Radon is a naturally occurring radioactive gas within soil and water. Radon is invisible, odorless, and tasteless. The only way we can detect radon is through testing. Long term exposure to radon may result in adverse health effects. The risk and/or severity with which an individual may be impacted includes lifestyle factors, such as if you are a smoker or former smoker. The EPA estimates that exposure to radon gas in the home is responsible for over 20,000 lung cancer deaths each year.
Due to the health impacts associated with radon exposure, owners of multifamily properties as well as lenders test to characterize potential risk. While the EPA recommends testing, most radon requirements and oversight of Radon Professionals are regulated at the state level. Furthermore, state radon requirements vary, and in some states only include single family homes. Testing and mitigation for multifamily properties are often completed to comply with lender policy or by federally sponsored financing program guidance during due diligence review, as with properties financed by HUD loans.
What are the Proposed Radon Policy Improvements?
The FHFA directed the improvement of radon policies for Freddie Mac and Fannie Mae through the adoption of the EPA-Recommended voluntary consensus of ANSI/AARST standards. This includes testing 100% of ground contact areas as well as 10% of upper floors and also includes using a qualified Radon Professional. A qualified radon professional per the ANSI/AARST definition has established a national certification and state licensure or certification when applicable. Additionally, the professional must be present during all onsite activities for placement and retrieval of radon detectors.
Currently, a radon assessment is not required for Fannie Mae loans. Testing is recommended for sites located in areas known to have higher occurrences of elevated radon levels, but the sampling scope may be determined by a qualified Environmental Professional. For Freddie Mac loans, current standards require radon testing in 10% of ground-floor units with a minimum of one unit per building.
How Would the Proposed Radon Policy Improvements Impact the Loan Process?
Increased sampling requirements will increase due diligence costs as well as turnaround time. In order to avoid industry-wide delay with inspections and reporting, which can cause loan closing delays, the FHFA must determine the best implementation process. This should include a clear timeline in which the policy will take effect. To fulfill the increased demand for testing, environmental professionals will need time to obtain training and required licensure/certification to become qualified radon professionals. Furthermore, mitigation recommendations are typically completed within 12 months of closing for agency loans; however, an increase in demand for qualified mitigation professionals may increase the required time to complete these installations, in addition to the time needed for training and credentials.
In December 2020, HUD adopted the ANSI/AARST testing and mitigation standards within their Multifamily Accelerated Processing (MAP) Guidance. According to a March 31, 2021 letter to the FHFA from a coalition of multifamily stakeholder associations including MBA, NMHC and others, “This new revised sampling protocol has exposed shortages in the ranks of trained radon professionals to execute the test. This has added additional time and costs to tests as workers have had to travel across the country to carry out inspections. Expanding the number of properties that may be required to adopt this new protocol will, undoubtedly, exacerbate existing capacity issues.”
Increased costs and closing times on Fannie Mae and Freddie Mac loans could drive borrowers to pursue other financing opportunities.
What Happens Next?
We expect that the FHFA will indeed increase sampling requirements; the question is how much of an increase they will implement. Minimizing tenant exposure to radon is a priority, but opinions differ as to how much testing is considered reasonable risk tolerance based on current research and available data. FHFA must consider the potential reduction in exposure against the potential impact of increased sampling requirements across the lending spectrum, including borrowers, lenders, investors, syndicators, and, of course, tenants. The potential impact and risk tolerance varies for each of these stakeholders, adding complexity to the challenge of determining appropriate test levels. FHFA must also determine the best implementation process, whether changes will take effect immediately or gradually, and whether to provide any flexibility to allow for sampling after the loan closes. FHFA analysis of the listening session transcript is to occur through the end of the year. Therefore, we expect FHFA to announce their findings and decision in the first or second quarter of 2022.
A video and transcript of the FHFA listening session on radon is available here.