Contributed by Robert Nordlund, RS
Earlier this year, Fannie Mae and Freddie Mac announced important changes to condominium reserve funding requirements. Together, the two government-sponsored enterprises purchase approximately 70% of home mortgages. Buying mortgages from lenders keeps the housing market moving. It’s a good system, and the rule changes make it a stronger one if you understand why.
Fannie and Freddie have long held minimum standards intended to ensure basic sustainability, but the 2021 Surfside tragedy triggered fundamental changes that directly affect community associations.
The organizations raised reserve funding standards in two ways that are sending shock waves through the housing industry. The changes are intended to alter the behavior of boards blatantly prioritizing low monthly assessments over the true cost of deterioration.
Only foolish community association boards will fail to adjust. Management companies and condo boards nationwide need to take the changes seriously and act now. Here’s a concise summary of the changes:
No more baseline funding exceptions. Fannie and Freddie currently require at least 10% of a condominium association’s budget to be transferred to reserves with exceptions available for associations demonstrating less is sufficient. Now, boards requesting an exception must present their case using the highest funding plan option in their reserve study. In other words, you can no longer use a minimum standard to request an exception.
Minimum reserves climb to 15%. Starting Jan. 4, 15% of a condominium association’s budget must go to reserves. Fannie and Freddie know most associations need to set aside approximately 25% of their budgets to offset ongoing deterioration and avoid special assessments. Associations claiming this rule change makes their homes 5% more expensive are wrong; their deterioration costs are already higher than 15%.
Funding reserves at 15% simply makes future special assessments smaller and less frequent. The homeowner’s total cost of ownership doesn’t change; the timing does. Note that this percent of budget metric doesn’t even require a reserve study. It only requires a budget. This standard says nothing about adequacy, actual cash on hand, or reserve fund preparedness measured in terms of percent funded for upcoming projects.
While individual lenders are free to hold higher standards, and many will, a condo association funding reserves at or above 15% of budget will clear the Fannie and Freddie standard. Mortgage applications should move forward smoothly outside of a particularly picky lender.
Funding reserves at least 15% of budget points an association toward a more sustainable future, which is in the best interest of the property and homeowner. It’s important to remember these are minimum standards. Fund your property needs as outlined in your reserve study. Don’t focus so much on the revised minimum standard that you fail to provide for the actual needs of the association.
Robert Nordlund is founder/CEO of Association Reserves in Westlake Village, Calif.
>>Learn more about Fannie Mae’s and Freddie Mac’s policy changes.
