Condominium Project Guidelines

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1 Contents... 1 Condominium Project Definitions... 2 Condominium Project Review Processes ) Limited Review for Attached Condominium Units ) Limited Review for Detached Condominium Units ) CPM Expedited Review ) Lender Full Review ) FNMA Approved Condominium Projects ) Project Eligibility Review Service (PERS) Ineligible Projects Ineligible Projects Defined Identification of Condominium Hotels Legal Requirements for CPM Expedited Review, Lender Full Review, and PERS Processes for Condominiums Condominium Insurance Requirements Hazard Insurance Flood Insurance Liability Insurance Fidelity Insurance Condominium Project Review Type Codes R e v i s e d

2 Condominium Project Definitions Condominium Definition: A condominium is a real estate project in which each unit owner has title to a unit in a building, an undivided interest in the common areas of the project, and sometimes the exclusive use of certain limited common areas. A condominium unit is a one (1) unit dwelling located in a condominium project. Warrantable Condominium Definition: A warrantable condominium is a condominium that meets standard Agency guidelines and is therefore eligible for delivery to FNMA and FHLMC. This definition does not apply to FHA insured or VA guaranteed loans. Guidelines include but are not limited to pre-sale requirements, occupancy requirements and LTV/TLTV restrictions. Guidelines for warrantable condominiums are subsequently outlined in these guidelines. Non-Warrantable Condominium Definition: A non-warrantable condominium is a condominium that does NOT meet standard Agency guidelines and is therefore not eligible for delivery to FNMA and FHLMC. Guidelines for non-warrantable condominiums are NOT outlined in these guidelines. Eligibility requirements for the type of project review differ if the project is established, new, newly converted, or a two-unit to four-unit project. An established project is a project in which (a) at least 90% of the total units in the project have been conveyed to the unit purchasers; (b) the project is complete (including all units and common elements); (c) the project is not subject to additional phasing or annexation; and (d) control of the homeowners association has been turned over to the unit owners. A new project or newly converted project is a project in which (a) fewer than 90% of the total units in the project have been conveyed to the unit purchasers; (b) the project is not fully completed (such as proposed construction, new construction, or the proposed or incomplete conversion of an existing building to a condominium); (c) the project is subject to additional phasing or annexation; or (d) control of the homeowners association has not been turned over to the unit owners. Two-unit to four-unit projects consist of four or fewer units and have unique eligibility requirements because of their small size. 2 R e v i s e d

3 Condominium Project Review Processes A condominium unit must meet the requirements of one of the following six review processes in order to be eligible as a warrantable condominium. Those review processes are: 1) Limited Review for attached units; 2) Limited Review for detached units; 3) CPM Expedited Review; 4) Lender Full Review; 5) FNMA Approved Project. 6) Project Eligibility Review Service (PERS) The attached Condominium Questionnaire or its equivalent must be used to gather the information needed for the CPM Expedited Review and Lender Full Review. The attached Limited Review Condominium Questionnaire or its equivalent must be used to gather the information needed for the Limited Review Process. The following provides detailed requirements for each of these reviews. 1) Limited Review for Attached Condominium Units Attached condominium units in new projects are NOT eligible for Limited Review. Investment properties are not eligible for Limited Review. Units financed under the Conforming Conventional High Balance program are not eligible for Limited Review. The Limited Review process is intended to be used on a spot loan basis, meaning that lenders may originate loans that arise through the ordinary course of business. A lender may originate more than one loan in a particular project under the Limited Review process provided that the project is an established project and meets the requirements for Limited Review. However, if the lender has targeted the project with specific marketing efforts or is named as a preferred lender by either the developer or the project s home owner s association, the project is ineligible for Limited Review and the lender must use one of the other project review processes. Attached condominium units in established projects are eligible for Limited Review as follows: o o o o o o The project may not be an ineligible project as shown in the Ineligible Projects section of this Guide. The project may not consist of manufactured homes. At least 90% of the total units in the project have been conveyed to the unit purchasers. The project is 100% complete (including all units and common elements). The project is not subject to additional phasing or annexation. Control of the homeowners association has been turned over to the unit owners. 3 R e v i s e d

4 o o o o o The project must be covered by insurance in accordance with the Insurance section of this guide. Phase I and II environmental hazard assessments are not required for condo projects unless an environmental problem is identified through the performance of the project underwriting or due diligence. The project is created and exists in full compliance with applicable laws and regulations including all state law requirements for the jurisdiction in which the project is located. All rehabilitation work involved in a condo conversion must have been completed in a professional manner. If the project is a new conversion that does not involve gut rehabilitation, the underwriter must review an engineer s report, or other substantially similar report, to verify that all necessary repair(s) are complete, and replacement reserves are identified for all capital improvements and noted as adequate by the party evaluating the project. Gut rehabilitation refers to the renovation of a property down to the shell of the structure, including the replacement of all HVAC and electrical components. For a conversion that was legally created during the past three years, the architect s or engineer s report, or functional equivalent, that was originally obtained for the conversion must comment favorably on the structural integrity of the project and the condition and remaining useful life of the major project components, such as the heating and cooling systems, plumbing, electrical systems, elevators, boilers, roof, etc. The LTV/CLTV is within the maximum allowable as follows. Limited Review: Established Projects Attached Condominium Units Maximum LTV/CLTV% Occupancy Type DU Approve Manual Underwriting Recommendations Principal Residence < 90% < 80% Second Home < 75% < 75% Investment Property Not allowed Not allowed 2) Limited Review for Detached Condominium Units Detached unit investment properties are NOT eligible for Limited Review, unless the loan has received an Approve/Eligible from DU. When a Limited Review for a mortgage secured by a detached unit in a condominium project is performed, the following eligibility criteria are being warranted to have been met: o The mortgage is secured by a single detached unit in a condominium project and is not a manufactured home; o The project is not an ineligible project as shown on the attached Ineligible Projects. o The condominium unit is occupied as the owner s principal residence or second home; o The appraiser commented on, and reflected in the appraisal report, any effect that 4 R e v i s e d

5 o o buyer resistance to the condominium form of ownership has on the market value of the individual unit and, if the project is new, the appraiser used as a comparable sale at least one detached condominium unit (which may be located either in a competing project or in the subject project, if it is offered by a builder other than the one that built the subject unit); The mortgage title insurance policy satisfies the special title insurance requirements for units in condominium projects; and The property is either covered by the type of hazard and flood insurance coverage required for single-family detached dwellings (if the condominium unit consists of the entire structure as well as the site and air space) or is covered by the project s master hazard and flood insurance policies (if the condominium unit consists only of the air space for the unit and the improvements and site are considered to be common areas or limited common areas). 3) CPM Expedited Review Florida condominium projects are not eligible for this review process. Units financed under the Conforming Conventional High Balance program are not eligible for this review process. CPM is a web-based tool that is used to provide lender-specific project acceptance for attached and detached, new, established, and two-unit to four-unit condominium projects that is, all condominium projects, except those consisting of manufactured housing units. The CPM login site address is A password is required. Evidence of approval of the project by CPM must be retained in the loan file. The homeowners' association budget (the actual budget for established projects or the projected budget for new projects) for all projects except two-unit to four-unit projects must be reviewed. This review must determine that the budget is adequate (i.e., it includes allocations for line items pertinent to the type of condominium), provides for the funding of replacement reserves for capital expenditures and deferred maintenance (at least 10% of the budget), and provides adequate funding for insurance deductible amounts. If the project is new, it must meet the legal requirements addressed in the Legal Requirements section of this guide. If the project is established, the legal document review is not required. Conversions created in the last 3 years require an Engineer s Report. If the project is new or newly converted, the loan file must contain copies of the recorded legal documents (Articles of Incorporation, Master Deed/Declarations, By-Laws). No more than 15% of the total units in a project can be 30 days or more past due on the payment of their condominium/association fee payments. The project may not be an ineligible project as shown in the Ineligible Projects section of this Guide. 5 R e v i s e d

6 4) Lender Full Review Lender Full Review process is another method for the review of new, newly converted, and established condominium projects. General Requirements: New and newly converted projects in Florida with less than 5 units must be approved through PERS. New and newly converted projects with 5 or more units in Florida are not eligible for financing. In addition, loans secured by condominiums in Florida are limited to primary residences only and Conventional products are limited to a maximum LTV/CLTV of 75%. The project may not be an ineligible project as shown in the Ineligible Projects section of this Guide. The project must not be a manufactured housing project. No more than 15% of the total units in a project can be 30 days or more past due on their HOA dues. The project is created and exists in full compliance with applicable laws and regulations including all state law requirements for the jurisdiction in which the project is located. Any right of first refusal in the condominium project documents will not adversely impact the rights of the mortgagee or its assignee to: o Foreclose or take title to a condominium unit pursuant to the remedies in the mortgage; or o Accept a deed or assignment in lieu of foreclosure in the event of default by a mortgagor; or o Sell or lease a unit acquired by the mortgagee or its assignee. The project must meet the insurance requirements as stated in the Insurance Requirement section of this guide. Phase I and II environmental hazard assessments are not required for condominium projects unless an environmental problem has been identified through the performance of the project underwriting and/or due diligence. In the event that environmental problems are identified, they must be determined to be acceptable, as described in the FNMA Selling Guide, E-2-03, Suggested Format for Phase I Environmental Hazard Assessments. All rehabilitation work involved in a condominium must have been completed in a professional manner. If the project is a new conversion that does not involve gut rehabilitation, an engineer's report or other substantially similar report must be reviewed, to verify that (a) all necessary repair(s) are complete and (b) replacement reserves are identified for all capital improvements and noted as adequate by the party evaluating the project. (Gut rehabilitation refers to the renovation of a property down to the shell of the structure, including the replacement of all HVAC and electrical components.) 6 R e v i s e d

7 For a conversion that was legally created during the past three years, the architect's or engineer's report, or functional equivalent, that was originally obtained for the conversion must comment favorably on the structural integrity of the project and the condition and remaining useful life of the major project components such as the heating and cooling systems, plumbing, electrical systems, elevators, boilers, roof, etc. Additional Requirements for Established Condominium Projects (Excluding Two-Unit to Four- Unit Projects): When performing a Lender Full Review of an established condominium project, the review must comply with the general eligibility requirements for all projects, as listed above, as well as the following requirements: Control of the owners association must have been turned over to the unit purchasers. At least 90% of the total units in the project must have been conveyed to unit purchasers. All units, common elements, and facilities within the project must be 100% complete, and the project cannot be subject to additional phasing or annexation. If the project is not newly converted, at least 51% of the total units in the project must have been conveyed to owner-occupant principal residence or second home purchasers. However, this requirement shall not apply when the subject loan is a primary residence or second home. If the project is newly converted, at least 70% of the total units in the project or subject legal phase must have been conveyed or be under a bona fide contract for purchase to principal residence or second home purchasers. Fannie Mae is clarifying its condominium project owner-occupancy ratio policy to include REO units that are for sale (not rented) as owner-occupied units in the owner- occupancy ratio. The homeowners' association actual budget must be reviewed to determine that it is adequate (i.e., it includes allocations for line items pertinent to the type of condominium), provides for the funding of replacement reserves for capital expenditures and deferred maintenance (at least 10% of the budget), and provides adequate funding for insurance deductible amounts. No single entity (the same individual, investor group, partnership, or corporation) may own more than 10% of the total units in the project. All facilities related to the project must be owned by the unit owners or the homeowners' association. The developer may not retain any ownership interest in any of these facilities. In addition, the amenities and facilities including parking and recreational facilities may not be subject to a lease between the unit owners or the homeowners' association and another party. Separate metering of individual units is recommended, but not generally required. For projects in which the units are not separately metered, it must be determined that having multiple units on a single meter is common and customary in the local market where the project is located, and it must be confirmed that the project budget includes adequate funding for utility payments. 7 R e v i s e d

8 The units in the project must be owned in fee simple or leasehold, and the unit owners must be the sole owners of, and have rights to the use of, the project's facilities, common elements, and limited common elements. The project must be demonstrably well managed. If the project is professionally managed the management contract should be for a reasonable term, and the management contract s termination provision must not require a penalty payment or advance notice of more than 90 days. The project must be located on one contiguous parcel of land. The project may be divided by a public street. The structures within the project must be within a reasonable distance from each other. Common elements and facilities such as recreational facilities and parking must be consistent with the nature of the project and competitive in the marketplace. In addition to designating the project type as S in H20, the underwriter must complete the Established Condominium Project Review Worksheet and Certification, in order to certify that the project fully complies with FNMA requirements for the Lender Full Review Process for Established Projects. The completed and signed form must be retained in the credit e-file for the loan. Additional Requirements for New and Newly Converted Condominium Projects (Excluding Two-Unit to Four-Unit Projects): When performing a Lender Full Review of a new or newly converted condominium project, the review must comply with the general eligibility requirements for all projects, as listed above, as well as the following requirements: Note that new and newly converted projects with 5 or more units in Florida are not eligible for financing. The project, or the subject legal phase, must be "substantially complete." This means that a certificate of occupancy (or other substantially similar document) has been issued by the applicable governmental agency for the project or subject phase and that all the units in the building in which the unit securing the mortgage is located are complete, subject to the installation of "buyer selection items" such as appliances. At least 70% of the total units in the project or subject legal phase must have been conveyed or be under a bona fide contract for purchase to owner-occupant principal residence or second home purchasers. For a specific legal phase (or phases) in a new project, at least 70% of the total units in the subject legal phase(s), considered together with all prior legal phases, must have been conveyed (or be under contract to be sold) to owner-occupant principal residence or second home purchasers. For the purposes of this review process, a project consisting of one building cannot have more than one legal phase. Fannie Mae is 8 R e v i s e d

9 clarifying its condominium project owner-occupancy ratio policy to include REO units that are for sale (not rented) as owner-occupied units in the owner- occupancy ratio. The project must meet the legal requirements as shown in the Legal Requirements section of this Guide. The minutes of the HOA s organizational meeting must be included in the loan file. The homeowners' association projected budget must be reviewed to determine that it is adequate (i.e., it includes allocations for line items pertinent to the type of condominium), provides for the funding of replacement reserves for capital expenditures and deferred maintenance (at least 10% of the budget), and provides adequate funding for insurance deductible amounts. No single entity (the same individual, investor group, partnership, or corporation), other than the developer during the initial marketing period, may own more than 10% of the total units in the project. The units in the project must be owned in fee simple or leasehold, and the unit owners must be the sole owners of, and have rights to the use of, the project's facilities, common elements, and limited common elements. The developer may not retain any ownership interest in any of the facilities related to the project. The amenities and facilities including parking and recreational facilities may not be subject to a lease between the unit owners or the homeowners association and another party. The developer or sponsor should provide for and promote the unit owners early participation in the management of the project. It is preferred that the project be managed by an independent professional management firm. The contract with the management firm should be for a reasonable term, and should include equitable provisions for its termination. Individual units in new condo projects must be available for immediate occupancy at the time of loan closing. The project must be located on one contiguous parcel of land. The project may be divided by a public street. The structures within the project must be within a reasonable distance from each other. Common areas and facilities such as recreational facilities and parking must be consistent with the nature of the project and competitive in the marketplace. Overall development plan: o If a new project is part of a larger development, and the unit owners are required to pay monthly assessments of more than $50 to a separate master association for that development, lenders must review the overall development plan for the master association to evaluate the acceptability of the project. o When reviewing the overall development plan to determine the project s potential viability, evaluate the consistency of future and existing improvements, time limitations for expansion, and reciprocal easements between legal phases. Determine that acceptable completion assurance arrangements have been provided for. These include cash deposits, letters of credit, assignments of certificates of deposit, or assignments of other assets that can be easily converted to cash. 9 R e v i s e d

10 Similar arrangements must be provided to support assurances against construction and structural defects. The assurances should protect each unit against defects that become apparent within one year from the date of its settlement, and cover all common facilities for one year from the time when units that represent 60% of the votes in the homeowners association have been transferred. The sales program developed for marketing units in a project must recognize and provide procedures for complying with all laws pertaining to the advertising and sale of real estate, the form and content of sales agreements, and the method for handling deposits connected with a sale. When the homeowners association retains the right to provide a substitute buyer or to have the first option to purchase a unit, that right cannot be exercised in any way that could be interpreted as unlawful discrimination or impair the marketability of the units in the project. In addition to designating the project type as R in H20, the underwriter must obtain evidence that Caliber Funding has approved the project under the FNMA requirements for the Lender Full Review Process for New or Newly Converted Projects. Evidence of the approval must be retained in the credit e-file for the loan. Additional Eligibility Requirements for Two-Unit to Four-Unit Condominium Projects: When performing a Lender Full Review of a project consisting of two to four units, the review must comply with the general eligibility requirements for all projects, listed above, as well as the following requirements: No single entity (the same individual, investor group, partnership, or corporation) may own more than one unit within the project. All units, common elements, and facilities within the project including those that are owned by any master association must be 100% complete. All but one unit in the project must have been conveyed to owner-occupant principal residence or second home purchasers. The units in the project must be owned in fee simple or leasehold, and the unit owners must be the sole owners of, and have rights to the use of, the project's facilities, common elements, and limited common elements. 5) FNMA Approved Condominium Projects Florida condominium projects are not eligible for this process. FNMA will no longer perform project reviews or issue acceptances for condominium projects with the exception of projects consisting of manufactured homes or for new and newly converted projects submitted through PERS. 10 R e v i s e d

11 FNMA will continue to publish a listing of Accepted Condos at For projects that receive Conditional Final Project Acceptance status, the list will include the project name, project/phase ID number, Conditional Final Project Acceptance expiration date, and the condition(s) that must be cleared before a mortgage secured by a unit in the project can be delivered. The individual mortgage file must include documentation evidencing that the project meets the presale and/or construction completion requirements. The documentation may include Fannie Mae's Warranty of Presales (Form 1029) and Appraisal Update and/or Completion Report (Form 1004D) or other substantially similar documents. 6) Project Eligibility Review Service (PERS) Beginning January 15, 2009, new and newly converted condominium projects may be submitted to FNMA for review to determine eligibility. The Lender Full Review and CPM Expedited Review processes are still available for new and newly converted condominium projects, except for those located in Florida. PERS approval is required for all new and newly converted condominium projects in Florida. However, note that new and newly converted condominium projects with 5 or more units in Florida are not presently eligible for financing. In addition, loans secured by condominiums in Florida are limited to primary residences only and Conventional products are limited to a maximum LTV/CLTV of 75%. Because the cost for this service can be quite high and we will be charged regardless of the decision, we must be in receipt of the fee from the broker before we can submit the package to FNMA for review. A qualified attorney engaged by the lender must review the legal documents for all condominium projects submitted to PERS and determine that the documents are in compliance with the legal requirements as described in the Legal Requirements section of this Guide. This determination must be documented by the attorney in writing but need not rise to the level of a formal, written legal opinion. The attorney may be the same person who prepared the legal documents or an attorney employed by the lender, but he or she cannot be an employee, principal, or officer of the developer or sponsor of the project. The lender must complete Fannie Mae Form 1054 and attach the attorney review as part of the PERS submission process. Lender must retain all legal documents and make available to Fannie Mae upon request. If a basic review of the project indicates that it satisfies the eligibility requirements, the underwriter will complete a project submission package, which includes a Project Eligibility Review Service Document Checklist (Form 1030) and Application for Project Approval (Form 1026). These forms are posted on efanniemae.com. The complete project package, including all relevant supporting documentation, is then sent by to A member of the project standards team will review the project package to determine if the project is eligible for approval, and will then issue one of the following decisions via Conditional Project Approval, Final Project Approval, Ineligible, or Suspension of the Application. 11 R e v i s e d

12 PERS-approved projects will be posted on efanniemae.com. Conditional Project Approval decisions will expire after six months and Final Project Approval decisions will expire one year after issuance. PERS-reviewed projects determined to be ineligible for delivery to Fannie Mae will also be identified on efanniemae.com. Lenders will be charged a fee for any project submitted to Fannie Mae s PERS as follows: o Optional review: The base review fee for a new project is $1,200 plus $30 for each unit in the project or legal phase up to a maximum of $15,000 per project. o Mandatory review: The base review fee is waived and only the $30 per unit fee applies for a new or newly converted condominium project located in Florida up to a maximum of $15,000 per project. o Subsequent phase: The greater of $600 or $30 for each new unit in additional legal phases of a previously approved project. o Extensions: The greater of $500 or $30 for each unit for the legal phase or project. Conditional and final extensions will be granted as appropriate for a maximum of six months. 12 R e v i s e d

13 Ineligible Projects Ineligible Projects Defined A project that falls within any of the following classifications is not eligible for conventional conforming financing. Condominium hotels Any project that is managed and operated as a hotel or motel, even though the units are owned individually. Projects with any of the following characteristics are considered to be hotel-type projects and therefore, ineligible: o projects that include registration services and offer rentals of units on a daily basis; o projects with names that include the words hotel or motel ; o projects that restrict the owner s ability to occupy the unit; and o Projects with mandatory rental pooling agreements that require the unit owners to either rent their units or to give a management firm control over the occupancy of the units. These formal agreements between the developer, homeowner s association, and/or the individual unit owners, obligate the unit owner to rent the property on a seasonal, monthly, weekly, or daily basis. In many cases, the agreements include blackout dates, continuous occupancy limitations, and other such use restrictions. In return, the unit owner receives a share of the revenue generated from the rental of the unit. See the following section Identification of Condominium Hotels for additional guidance when making the distinction between non-residential condominium hotel-type projects that are ineligible and second home residential projects in resort locations. Projects with non-incidental business operations owned or operated by the owners association such as, but not limited to, a restaurant, spa, health club, etc. Investment securities projects that have documents on file with the Securities and Exchange Commission, or projects where unit ownership is characterized or promoted as an investment opportunity. Common interest apartments or community apartment projects - any project or building that is owned by several owners as tenants-in-common or by a homeowners association in which individuals have an undivided interest in a residential apartment building and land, and have the right of exclusive occupancy of a specific apartment in the building. Timeshare or segmented ownership projects. Houseboat projects. Multi-dwelling unit condominiums projects that permit an owner to hold title to more than one dwelling unit, with ownership of all of his or her owned units evidenced by a single deed and financed by a single mortgage. 13 R e v i s e d

14 Condominium projects that represent a legal, but non-conforming, use of the land, if zoning regulations prohibit rebuilding the improvements to current density in the event of their partial or full destruction. Any project for which the owner s association is named as a party to current litigation or, for any project that has not been turned over to the association or corporation, for which the project sponsor or developer is named as a party to current litigation that relates to the project. (Clarification: projects where the homeowners' association is named as the plaintiff in a foreclosure action or as a plaintiff in an action for past due homeowners' association dues, are not considered ineligible projects.) Project where more than 20% of the total space is used for non-residential purposes. Project where a single entity (the same individual, investor group, partnership, or corporation) owns more than 10% of the total units in the project. New projects where the seller is offering sale/financing structures in excess of Fannie Mae s eligibility policies for individual mortgage loans. These excessive structures include, but shall not be limited to, builder/developer contributions, sales concessions, HOA or principal and interest payment abatements, and/or contributions not disclosed on the HUD-1 Settlement Statement. Identification of Condominium Hotels The project must be carefully reviewed to determine its eligibility. Several sources of information may be use, including, but not limited to, the appraisal, the contract for sale, and the Internet. The selection of the appraiser is a key element in obtaining an accurate appraisal report. An appraiser who is not familiar with a specific real estate market may not have adequate information available to perform a reliable appraisal. The appraiser is expected to provide an accurate description of the project to include any characteristics that may be an indication that the project is ineligible. The appraisal report may identify project characteristics that do not definitively determine that the project is a condominium hotel; however, it provides evidence that would require the performance of additional research. These project characteristics include, but are not limited to: Central telephone system; Room service; Units that do not contain full-sized kitchen appliances; Daily cleaning service; Advertising of rental rates; Registration service; Restrictions on interior decorating; Franchise agreements; Central key systems; Location of the project in a resort area; 14 R e v i s e d

15 The occupancy of the project. (The project may have few or even no owner occupants.); or Projects converted from a hotel or motel. In addition to the appraisal, the contract for sale should be thoroughly examined to determine, among other information, if there are guaranteed rent-backs, references to rental pooling or management agreements, and SEC filing references and/or prospectus documents. The Internet has become a common source for project and unit-specific information. The applicable project s Web site may contain information on the project type, amenities, and availability of units for rent. 15 R e v i s e d

16 Legal Requirements for CPM Expedited Review, Lender Full Review, and PERS Processes for Condominiums Compliance with laws The condominium project has been created and exists in full compliance with the state law requirements of the jurisdiction where the condominium project is located and all other applicable laws and regulations. Limitations on ability to sell/right of first refusal Any right of first refusal in the condominium project documents will not adversely impact the rights of a mortgagee or its assignee to: a. Foreclose or take title to a condominium unit pursuant to the remedies in the mortgage; b. Accept a deed or assignment in lieu of foreclosure in the event of default by a mortgagor; or c. Sell or lease a unit acquired by the mortgagee or its assignee. Amendments to Documents a. The project documents must provide that amendments of a material adverse nature to mortgagees be agreed to by mortgagees that represent at least 51% of the votes of unit estates that are subject to mortgages. b. The project documents must provide for any action to terminate the legal status of the project after substantial destruction or condemnation occurs or for other reasons to be agreed to by mortgagees that represent at least 51% of the votes of the unit estates that are subject to mortgages. c. The project documents may provide for implied approval to be assumed when a mortgagee fails to submit a response to any written proposal for an amendment within 60 days after it receives proper notice of the proposal, provided the notice was delivered by certified or registered mail, with a "return receipt" requested. Notwithstanding the foregoing, project documents that were recorded prior to August 23, 2007, may provide for implied approval to be assumed when a mortgagee fails to submit a response to any written proposal for an amendment within 30 days after it receives proper notice of the proposal, provided the notice was delivered by certified or registered mail, with a "return receipt" requested. Rights of Condo Mortgagees and Guarantors The project documents must give the mortgagee and guarantor of the mortgage on any unit in a condominium project the right to timely written notice of: a. Any condemnation or casualty loss that affects either a material portion of the project or the unit securing its mortgage; b. Any 60-day delinquency in the payment of assessments or charges owed by the owner of any unit on which it holds the mortgage; c. A lapse, cancellation, or material modification of any insurance policy maintained by the homeowners' association; and d. Any proposed action that requires the consent of a specified percentage of mortgagees. 16 R e v i s e d

17 First mortgagee's rights confirmed No provision of the condominium project documents gives a condominium unit owner or any other party priority over any rights of the first mortgagee of the condominium unit pursuant to its mortgage in the case of payment to the unit owner of insurance proceeds or condemnation awards for losses to or a taking of condominium units and/or common elements. Unpaid dues - Any first mortgagee who obtains title to a condominium unit pursuant to the remedies in the mortgage or through foreclosure will not be liable for more than six months of the unit's unpaid regularly budgeted dues or charges accrued before acquisition of the title to the unit by the mortgagee. If the condominium association's lien priority includes costs of collecting unpaid dues, the lender will be liable for any fees or costs related to the collection of the unpaid dues. Attorney's Opinion Established Projects and All Two, Three, and Four Unit Projects: No legal document review representation and warranty is required. New Condominium Projects (excluding all Two, Three, and Four Unit Projects): The underwriter must represent and warrant that the project complies with the legal requirements discussed herein. Condominium Projects Submitted to PERS: A qualified attorney engaged by the lender must review the legal documents for all condominium projects submitted to PERS, and determine that the documents are in compliance with the legal requirements discussed herein. This determination must be documented by the attorney in writing but need not rise to the level of a formal, written legal opinion. The attorney may be the same person who prepared the legal documents or an attorney employed by the lender, but he or she cannot be an employee, principal, or officer of the developer or sponsor of the project. The writing reflecting compliance with the legal requirements must be attached as part of the PERS submission package. 17 R e v i s e d

18 Condominium Insurance Requirements The unit must be covered by the appropriate hazard and flood insurance policies. In addition to hazard and flood insurance, liability and fidelity insurance for a project may be required. All coverage must be consistent with local, state, and federal insurance laws. Hazard Insurance The borrower is required to obtain a walls-in coverage policy (commonly known as HO-6 policy) unless it can be documented that the master policy provides the same interior unit coverage. The master policy must include replacement of improvements and betterment coverage to cover any improvements that the borrower may have made to the unit. The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit s appraised value and must be included in the impound account on all loans. In the event such coverage cannot be obtained, the lender should call the Fannie Mae Project Standards Department at The standard requirement for a 5 percent deductible applies. The following special endorsements are required: An Inflation Guard Endorsement, when it can be obtained; Building Ordinance or Law Endorsement, if the enforcement of any building, zoning, or land-use law will result in loss or damage, increased cost of repairs or reconstruction, or additional demolition and removal costs (The endorsement must provide for contingent liability from the operation of building laws, demolition costs, and increased costs of reconstruction.); and Steam Boiler and Machinery Coverage Endorsement, if the project has central heating or cooling. (This endorsement should provide for the insurer s minimum liability per accident to at least equal the lesser of $2 million or the insurable value of the building(s) housing the boiler or machinery.) In lieu of obtaining this as an endorsement to the commercial package policy, the project may purchase separate stand-alone boiler and machinery coverage. In addition, the policy should provide that any Insurance Trust Agreement will be recognized; the right of subrogation against unit owners will be waived; the insurance will not be prejudiced by any acts or omissions of individual unit owners that are not under the control of the owners association; and The policy will be primary, even if a unit owner has other insurance that covers the same loss. 18 R e v i s e d

19 These provisions usually are covered by a Special Condominium Endorsement. Insurance policies should show the owners association as the named insured. If the condominium s legal documents permit it, the policy can specify an authorized representative of the owners association, including its insurance trustee, as the named insured. The loss payable clause should show the owners association or the insurance trustee as a trustee for each unit owner and the holder of each unit s mortgage. The insurance policy also must include the standard mortgage clause. The insurance policy should require the insurer to notify in writing the owners association (or insurance trustee) and each first mortgage holder named in the mortgage clause at least ten days before it cancels or substantially changes a condominium project s coverage. The master insurance policy must cover only the project in which the individual unit to be financed is located. It may not cover multiple unaffiliated condominium associations or projects, nor be set up as a self insurance arrangement whereby the owner s association is self insured or has banded together with other unaffiliated associations to self insure all of the general and limited common elements of the various associations. Flood Insurance If any part of a project s improvements are in a Special Flood Hazard Area which is designated as A, AE, AH, AO, AR, A1-30, A-99, V, VE, V1-30, or VO on a Flood Insurance Rate Map (FIRM) the owners association must maintain a master or blanket policy of flood insurance and provide for the premiums to be paid as a common expense. Flood insurance for individual condominium units is not generally required. For condominium projects, the policy must cover common element buildings and any other common property. When the project consists of high-rise or other vertical buildings, the owners association must obtain a Residential Condominium Building Association Policy for each building that is located in a Special Flood Hazard Area. The policy must cover all of the common elements and property, as well as each of the individual units in the building. When an owners association refuses to obtain a Residential Condominium Building Association Policy or when the Residential Condominium Building Association Policy does not comply with the insurance requirements, a separate policy is required for each dwelling unit that secures the subject mortgage. Properties that are located within the Coastal Barrier Resources System (CBRS) or are within an Otherwise Protected Area (OPA), as defined by the Coastal Barrier Resources Act, may not be eligible for Federal flood insurance. When it is determined that a property is located within the CBRS or is within an OPA, the project or the unit must be covered by a flood insurance policy. 19 R e v i s e d

20 Flood insurance policies from private insurance carriers are acceptable when a property securing a mortgage within the CBRS or is within an OPA is not eligible for Federal flood insurance. The amount of coverage should be at least equal to the lesser of 100% of the insurable value of each insured building (including all common elements and property) or the maximum coverage available under the applicable National Flood Insurance Program. The amount of flood insurance coverage should be based on the coverage requirement for first mortgages secured by one-family to four-family properties. For those condominium projects that consist of high-rise buildings or other vertical buildings, the required coverage has three components: (1) the building coverage should equal 100% of the insurable value of the common elements and property (including machinery and equipment that are part of the building); (2) the contents coverage should equal 100% of the insurable value of all contents (including machinery and equipment that are not part of the building) that are owned in common by the association members; and (3) the coverage for each unit should be the lesser of $250,000 or the amount of its replacement cost. If this required coverage exceeds the maximum coverage available under the National Flood Insurance Program, we will accept coverage equal to the maximum amount that is available. The maximum deductible amount for policies covering the common areas and elements or buildings in a condominium project is the maximum deductible available from the National Flood Insurance Program, which is currently $25,000 ($5000 for a unit owner s policy). Liability Insurance Verification of liability insurance coverage is required as part of the project review, with the exception of condominium projects processed under the limited project review procedures. The owners association must maintain a commercial general liability insurance policy for the entire project including all common areas and elements, public ways, and any other areas that are under its supervision. The insurance also should cover commercial spaces that are owned by the owners association, even if they are leased to others. The commercial general liability insurance policy should provide coverage for bodily injury and property damage resulting from the operation, maintenance, or use of the project s common areas and elements. The amount of coverage should be at least $1 million for bodily injury and property damage for any single occurrence. If the policy does not include severability of interest in its terms, we require a specific endorsement to preclude the insurer s denial of a unit owner s claim because of negligent acts of the owners association or of other unit owners. 20 R e v i s e d

21 The policy should provide for at least ten days written notice to the owners association before the insurer can cancel or substantially modify it. Similar notice also must be given to each holder of a first mortgage on an individual unit in the project. Fidelity Insurance Fidelity insurance is required for all attached-unit condominium projects that consist of more than 20 units. In those states that have statutory fidelity insurance requirements, those requirements are acceptable in lieu of the following criteria. The owners association must have blanket fidelity insurance coverage for anyone who either handles (or is responsible for) funds that it holds or administers, whether or not that individual receives compensation for services. The insurance policy should name the owners association as the insured and the premiums should be paid as a common expense by the association. The policy for a condominium project must include a provision that calls for ten days written notice to the owners association before the policy can be canceled or substantially modified for any reason. Similar notice also must be given to each holder of a first mortgage on an individual unit in the project. A management agent that handles funds for the owners association should be covered by its own fidelity insurance policy, which must provide the same coverage required of the owners association. The fidelity insurance policy should cover the maximum funds that will be in the custody of the owners association or its management agent at any time while the policy is in force. A lesser amount of fidelity insurance coverage is acceptable for a project if the project s legal documents require the owners association and any management company to adhere to certain financial controls. Even then, the fidelity insurance coverage must at least equal the sum of three months of assessments on all units in the project. Reduced fidelity insurance coverage based on greater financial controls may be accepted only when the financial controls take one or more of the following forms: The owners association or the management company maintains separate bank accounts for the working account and the reserve account, each with appropriate access controls, and the bank in which funds are deposited sends copies of the monthly bank statements directly to the owners association; The management company maintains separate records and bank accounts for each owners association that uses its services and the management company does not have the authority to draw checks on or to transfer funds from the owners association s reserve account; or Two members of the Board of Directors must sign any checks written on the reserve account. 21 R e v i s e d

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