Condo Sellers Balk at Federal Disclosure Rule for Structural Flaws

Resistance from condo boards to a new questionnaire that Fannie Mae and Freddie Mac are requiring condo sellers to fill out in the wake of the deadly collapse of a Florida high-rise tower last year is having a chilling effect on condo markets across the county, according to a report in the Washington Post.

Federal regulations enacted after the Champlain Towers South high-rise collapse in Surfside FL, which killed 98 people, requires condo boards, homeowners associations or property managers to answer a 12-question form about the structural integrity of the building and the financial reserves of parties involved in the transaction before any federally backed loans can be approved.

Properties that don’t meet the disclosure requirements are added to a list of buildings ineligible for mortgage loans backed by Fannie Mae.

The federal housing agencies have broadly applied the new rules to buildings across the country—including duplex townhouses that aren’t high-rises—spurring a backlash from condo boards and homeowners associations who say they can’t—or won’t—fill out the forms.

“It was initially suggested to us that this change would only be a challenge in Florida, but we’re seeing it in markets across the country—urban, rural, coastal and central,” Ken Fears, a senior policy representative for banks, lending and housing finance for the National Association of Realtors, told WashPost.

According to the newspaper’s report, condo associations are refusing to fill out the form because they fear liability. Board members and property management companies say some of the questions on the form require a level of expertise beyond the capacity of the people filling them out.

One of the questions on the form asks the condo board if it is aware of any deficiency in the structure of the building, which boards say they can’t answer without consulting structural engineers. Another question asks boards if a building will be in violation of any zoning laws that may be enacted at a future time, something they say is impossible to predict.

According to CondoTek, a company that reviews condo documentation for lenders, the federal ineligibility list has quickly grown to include more than 1,000 condo buildings since the rules were enacted.

Real estate agents, condo associations, homeowners associations and mortgage brokers told the newspaper that the questionnaire is causing would-be sellers to think twice about condo transactions, creating more difficulty for first-time buyers.

Fannie Mae’s enhanced scrutiny of transaction financing and project reserves on condo loans is proving particularly onerous to first-time buyers, the report said.

“Seniors, first-time homebuyers, those who are able to own a home because condominiums are often more affordable housing options, they’re going to lose out,” Dawn Bauman, senior VP of the Community Associations Institute, told the newspaper.

WashPost cited a first-time townhouse buyer who had to find another underwriter for a mortgage loan because the management company and the homeowners association refused to fill out Fannie Mae’s questionnaire, preventing an FHA-backed loan from closing despite the seller “begging” them to finish the paperwork in order to use the sale proceeds to pay medical bills.

A spokesperson for Fannie Mae said in a statement that the rules are “temporary” and are not having a large impact on the approval of loans backed by the federal housing agency.

“These measures help protect borrowers from physically unsafe or financially unstable projects,” the agency said.