Surfside Condominium Tragedy Results in Stricter Fannie Mae and Freddie Mac Requirements
On June 24, 2021, the Champlain Towers South in Surfside, Florida, partially collapsed, resulting in 98 dead and dozens more without a home. Preliminary investigations revealed that design failure, low-grade construction, and lack of adequate and routine maintenance of the structure all combined together was likely the cause of the catastrophe.
The consultation of the Miami Herald with engineers and a general contractor pointed out design flaws and structural weaknesses as one of the reasons for the tragedy. The parts that survived the collapse were underpinned by 24-by-24-inch columns, while the rest were less than half that size. The foundation for critical areas was not constructed in accordance with building codes set by the American Concrete Institute at the time the property was built.
On June 26, 2021, Surfside officials released the 2018 report by Engr. Frank Morabito, from when the condominium board first reviewed the tower. The report indicated that the property already had substantial structural damage in its pool deck and underground parking area. It also provided the association with an assessment of extensive and necessary repair, as well as an estimate of their costs. However, owners continued to delay completing the required substantial repairs to the structure and marginally performed surface repairs which obscured signs of damage with layers of concrete, pavers, and tiles.
Companies managing, insuring, financing, and regulating condominiums are affected by the disaster. The tragedy cautioned industries and stakeholders on the dangers of aging infrastructures and properties with critical deficiencies.
Notably, the catastrophe made mortgage giants wary of loans tied to assets with significant safety issues. Consequently, this leads to small lending companies becoming more conservative. To maintain confidence in the system, secondary mortgage market players Fannie Mae and Freddie Mac took action. They issued new requirements for mortgages relating to condominiums and cooperatives. These guidelines aim to elevate the standards for mortgage properties. They will also help prevent property disasters and the finance industry from suffering the aftermath.
Role of Federal Home Mortgage Companies
The Federal National Mortgage Association (FNMA – “Fannie Mae”) and Federal Home Loan Mortgage Corporation (FHLMC – “Freddie Mac”) are government-sponsored entities that play a significant role in mortgage affordability and availability. They buy the loans from banks and non-bank lenders, bundle them into mortgage-backed securities, and sell them to investors. They are part of the secondary mortgage market because they act as intermediaries between private lenders and security investors.
Banks use the proceeds they get from the federal mortgage company as a source to issue more loans to consumers. Fannie Mae and Freddie Mac also employ their earnings from selling securities to acquire new loans, and the cycle continues. Meanwhile, security buyers benefit by receiving lower risks from their investments. These mortgage giants provide liquidity, stability, and guarantees to banks, savings, investment, and other mortgage companies in the US.
Moreover, Fannie Mae and Freddie Mac also set the standards for loans and mortgages. These companies do not directly engage with consumers. But they lay down guidelines for lenders that eventually influence customers’ borrowing terms. Their specifications help protect the sector and its participants against high-risk mortgages.
New Fannie Mae and Freddie Mac Requirements for Mortgages[1]
In light of the Surfside condominium tragedy, Fanny Mae and Freddie Mac issued bulletins advising new requirements for mortgages issued on condominiums.
● Freddie Mac
Bulletin 2021-38 applies to residential mortgages sought for condominiums and cooperative projects with five or more attached units. Particularly, it issues review requirements for projects in need of critical repairs and projects with special assessments.
The bulletin defines critical repairs as those that significantly impact the building’s safety, soundness, structural integrity, or habitability. It also means repairs and replacements that affect unit values and the project’s financial viability. Mortgages sought in condo and coop projects with critical repairs will be ineligible for sale to Freddie Mac.
Additionally, a project is also ineligible if it has received a special assessment due to critical repairs.
● Fannie Mae
Fannie Mae’s Lender Letter (LL-2021-14) provides that the institution will no longer purchase loans secured by condo and co-op projects with significant deferred maintenance or that have received a directive to make repairs because of unsafe conditions.
The Lender Letter defines significant deferred maintenance as requiring a full or partial evacuation of the building for more than seven days or an unknown period to complete the repairs. It also covers deficiencies, defects, substantial damage, or deferred maintenance that impedes the safe and sound functioning of one or more of the major structural or mechanical elements.
Projects are also ineligible if they have failed to secure a certificate of occupancy or do not pass a regulatory inspection or recertification like those performed by the New Jersey Department of Community Affairs.
With the Fannie Mae and Freddie Mac temporary requirements, communities need to complete Form 476A, an addendum to Form 476 Condominium Project Questionnaire. The form aims to help them identify whether the property meets the Fannie Mae Lender Letter (LL-2021-14) and Freddie Mac Bulletin 2021-38.
Complying With Fannie Mae and Freddie Mac with Lockatong Engineering Services[2]
Lockatong Engineering can help community associations and cooperatives comply with various requirements. This includes performing a structural inspection and evaluation of the condominium building and identifying any critical structural deficiencies which complies with Fannie Mae and Freddie Mac requirements. This can assist the association in performing their due diligence in obtaining the necessary knowledge of the building’s structure. In addition to structural inspections, Lockatong can also conduct a reserve study so the association can financially plan for any needed structural improvements and/or maintenance.
The firm understands all national, state, industry, Fannie Mae, and Freddie Mac standards. It is also proficient in ASCE (American Society of Civil Engineers) guidelines for structural inspections of buildings with steel, concrete, or heavy timber construction. Lockatong Engineering services are prompt and customized to the client’s specific needs. Contact us today to schedule a consultation or building inspection with our professional New Jersey engineers.
[1] The above does not cover the individual condo unit buyer. That mortgage is also subject to the Fannie Mae and Freddie Mac guidelines.
[2] While our reserve study can identify structural defects, it is not a comprehensive ASCE inspection. A different structural inspection is required to meet that standard.
