2.09 Fannie Mae and Freddie Mac

• Library: South Carolina Community Association Law: Condominiums and Homeowners Associations (SCBar) (2019 Ed.)

2.09 Fannie Mae and Freddie Mac

A. History and Current Status

The Federal National Mortgage Association ("FNMA" or "Fannie Mae") and the Federal Home Loan Mortgage Corporation (FHLMC or "Freddie Mac") are "government sponsored private corporations" that purchase and sell real estate mortgages, including those on condominium units, thereby creating a national "secondary market" for sale and investment in real estate loans.¹⁸⁶ In general, Fannie Mae purchases mortgages from mortgage bankers and Freddie Mac purchases primarily from the savings and loan industry.¹⁸⁷ The two corporations are, in effect, the secondary mortgage market.¹⁸⁸ Thus, the requirements they impose for purchasing mortgages are of critical concern to developers, associations, and individual purchasers.

This section is not a comprehensive review of the current requirements of Fannie Mae and Freddie Mac. Rather, the discussion below simply highlights some of the conditions on condominium developments that may be imposed by virtue of the standards the two corporations have adopted. To understand the myriad of complex new requirements, one must carefully examine their publications, principally the Fannie Mae Selling Guide,¹⁸⁹ and the Freddie Mac Single-Family Seller/Servicer Guide.¹⁹⁰ Since the requirements of the two corporations are fairly similar, those set forth in the Fannie Mae Selling Guide are examined here.

B. Eligible Projects and General Requirements

Some condominium projects are unacceptable to Fannie Mae. It will not purchase or securitize loans secured by units in a number of specific types of projects.¹⁹¹ These include:

• Investment securities.¹⁹²
• Timeshare, fractional, or segmented ownership projects.¹⁹³
• Projects with mandatory upfront or periodic membership fees for use of recreational amenities — country club facilities and golf courses, for example — owned by an outside party including the developer or builder.¹⁹⁴
• Projects that are managed and operated as a hotel or motel, even though the units are individually owned.¹⁹⁵
• Projects with property that is not real estate, for example houseboat projects.
• Any project that is owned or operated as a continuing care facility.¹⁹⁶
• Projects with non-incidental business operations owned or operated by the condominium association including a restaurant, spa, or health club.¹⁹⁷
• Projects that do not meet the requirements for "live-work" projects.¹⁹⁸
• Projects in which the condominium association is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project.¹⁹⁹
• Any project that allows a priority lien for unpaid common expenses in excess of Fannie Mae's priority lien limitations.²⁰⁰
• Projects in which a single entity owns more than a prescribed total number of units in the project. ²⁰¹

Fannie Mae has insurance requirements for condominium associations or councils of co-owners.²⁰² Generally, it does not require individual insurance policies for a unit that secures a first mortgage, but if the governing documents permit unit insurance policies for each first mortgage that Fannie Mae purchases or securitizes, it will accept the individual unit insurance policies that meet its requirements. For condominium common elements Fannie Mae has property insurance requirements for blanket or master policies. A policy has to at a minimum protect against fire and all other hazards that are normally covered by the standard extended coverage endorsement, and all other perils customarily covered for similar types of projects, including those covered by the standard "all risk" or "special form" endorsement. Fannie Mae will also accept a policy that includes "broad form" covered causes of loss. Lenders are required to review the entire condominium project property insurance policy to ensure the association maintains a master or blanket type of insurance policy, with premiums paid as a common expense. Condominium association have either "single entity," "all-in," or "bare walls" coverage.

A "single entity" policy has to cover all of the general and limited common elements that are normally included in coverage, including fixtures, building service equipment, and common personal property and supplies belonging to the association and also has to cover fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed. The amount of coverage has to be sufficient to restore the unit to its condition prior to a loss claim event.²⁰³

An "all-in" or "all-inclusive" policy has to cover all of the general and limited common elements normally included in coverage including fixtures, building service equipment, and common personal property and supplies belonging to the association and fixtures, equipment, and replacement of improvements and betterments that have been made inside the individual unit being financed.²⁰⁴

A "bare walls" policy typically provides no coverage for unit interiors — fixtures, equipment, and replacement of interior improvements and betterments — and, therefore, the borrower has to secure an individual HO-6 policy that provides coverage sufficient to repair the unit to its condition prior to a loss claim event, as determined by the insurer.

The association master policy has to cover 100% of the insurable replacement cost of the project improvements, including the individual units in the project. A policy that includes Guaranteed Replacement Cost under which the insurer agrees to replace the insurable property regardless of the cost or Extended Replacement Cost under which the insurer agrees to pay more than the property's insurable replacement cost, or Replacement Cost under which the insurer agrees to pay up to 100% of the property's insurable replacement, either in the policy language or in a specific endorsement to the policy, is acceptable.

If the association policy has a coinsurance clause an Agreed Amount Endorsement or selection of the Agreed Value Option — which waives the requirement for coinsurance — is considered acceptable evidence that the 100% insurable replacement cost requirement has been met. If an Agreed Amount/Agreed Value provision is used, the Agreed Amount has to be no less than the estimated replacement cost. If the policy has a coinsurance clause and the clause is not waived, the amount of coverage must be at least equal to 100% of the insurable replacement cost of the project improvements.

The maximum deductible amount in the condominium association master policy can be no greater than 5% of the face amount of the policy. For blanket policies that cover both the individual units and the common elements, the maximum deductible amount related to the individual unit should be no greater than 5% of the replacement cost of the unit.

Fannie Mae requires the association policy to contain an Inflation Guard Endorsement, when...