Vermont Bar Journal
Summer 2008 - #11.
New Secondary Mortgage Market Guidelines for Attached Condominium Units: What Vermont Real Estate Attorneys Need to Know
The Vermont Bar Journal #174, Volume 34, No. 2 SUMMER 2008
New Secondary Mortgage Market Guidelines for Attached Condominium Units: What Vermont Real Estate Attorneys Need to Knowby Jeremy I. Farkas, Esq.In response to the current crisis in the secondary mortgage market, the two agencies that purchase the bulk of residential mortgages in the secondary market, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") have each revised their selling guides to modify the conditions under which they will purchase loans secured by mortgages of new attached condominium units. In the past, lenders could undertake a streamlined review of nearly all residential condominium projects, and if the project met certain minimum requirements they could sell the mortgages that were secured by those units to Fannie Mae or Freddie Mac. Under the revised guidelines, before Freddie Mac or Fannie Mae will agree to purchase mortgages secured by new attached condominium units, the lenders must first demonstrate that they have performed an extensive due diligence process to establish a project's financial viability and credit risk. In the words of Fannie Mae, it has "fully delegate[d] the project review processes for condominiums, cooperatives, and PUDs to our lenders . . . we will no longer perform project reviews or issue acceptances for condominium, cooperative, and PUD projects with the exception of most projects consisting of manufactured homes."(fn1)
Significantly, Fannie Mae and Freddie Mac are only requiring lenders to undertake more extensive due diligence in connection with mortgages secured by attached condominium units in new projects or by attached condominium units in existing, established projects if a unit is being purchased as an investment property, exempting from the review processes new and existing detached condominium units, new and existing so-called "zero-lot line" units (which Fannie Mae and Freddie Mac refer to as "PUDs"), and most attached condominium units in established, existing projects where the units will be used as a principal residence or second home.(fn2) It should also be noted that Fannie Mae offers lenders the choice of conducting expanded due diligence using a web-based service known as CPM, or by manually compiling the necessary information and assembling a hard file.
The new Fannie Mae guidelines are outlined in Announcement 07-18, dated November 15, 2007, as modified by Announcement 08-01 dated January 31, 2008, which amend Selling Guide Part XII, Project Standards. The new Freddie Mac guidelines are outlined in a Bulletin dated December 21, 2007 that amends its Single-Family Seller/Servicer Guide.(fn4)
The Fannie Mae and Freddie Mac guidelines are very similar. However, this article focuses on the new Fannie Mae guidelines because as part of each lender's due diligence process for new attached condominium projects (except for two to four unit projects), Fannie Mae requires each lender to represent and warrant that it has obtained an attorney's legal opinion as to a project's compliance with specific legal matters; although Freddie Mac requires lenders to make representations and warranties as to legal compliance, it does not require an attorney's opinion letter to substantiate the...