Jodi Horne: 0:00

These repairs have gone neglected for a very long time, because the association lacked the reserve funding to move forward. It's not that you know that they're trying to neglect these issues; they simply don't have the funds on hand. So, the key goal of our reserve policy change is to put associations in a stronger financial position to address these repairs and capital improvement needs before they become emergencies that have to be funded with expensive special assessments or before they become problems from a mortgage financing perspective.

Announcer: 0:35

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Association Insights and Marketplace, Association Reserves, Community Financials, Kevin Davis Insurance Services, and the Inspectors of Election. You'll find links to their website and social media in the show notes.

Robert Nordlund: 0:51

Welcome back to HOA Insights: Common Sense for Common Areas. I'm Robert Nordlund, and I'm here today for episode number 160 with a special guest I've known for years, Miss Jodi Horne, she's principal of single family collateral risk management at Fannie Mae, and that's a long title, but what that all means is that she's the one at Fannie Mae ultimately responsible for lending standards affecting community associations and their latest lending standard update in particular, so at any time Fannie Mae or Freddie Mac make an adjustment to their lending standards. It sends ripples throughout the community association and the entire lending industry. So, to lower your anxiety and to hear what's really going on, we've gone through a number of hoops, administrative hoops, to have Jodi here on the program today, speaking publicly on this issue. Well, we're here weekly, so if you missed last week's episode, number 159 Julie Adams, insightful, insightful, and candid conversation with Rolf Crocker. He's the CEO of Omni Community Management in California. Or if you missed any other prior episode, take a moment after today's program to listen from our podcast website, HOA insights.org or watch on our YouTube channel, but better yet, subscribe from any of the major podcast platforms or our YouTube channel, so you don't miss any future episodes. Becoming a subscriber also increases the podcast's position in search results, helping others find this free resource, so they can be better equipped to lead their association. Well, those of you watching on YouTube can see the HOA Insights mug that I have here that I got from our merch store, which you can browse through from our HOA insights.org website, or the link in our show notes. You'll find we have some great free stuff there, like board member Zoom backgrounds, and some specialty items for sale, like this mug. So, go with the merch store, see what we have for sale, and at least download a free Zoom background to use for your next online meeting. Well, we enjoy hearing from you, responding to the issues you're facing at your association. So, if you have a hot topic, a crazy story, I think there's an unlimited number of those, or a question you'd like us to address, you can contact us at 805-203-3130 or email us at podcast at HOA insights.org But today's episode is on me. I read the march 18 lending standards update, and I found them pretty straightforward and reasonable, but it created a stir in the community association industry with managers and reserves a professionals and homeowners all asking, what does this all really mean? So relax, adjust your volume, and we'll shortly have some answers for you. So, Jodi, welcome to the program.

Jodi Horne: 3:45

Thank you, Robert, for having me. It's so great to be here.

Robert Nordlund: 3:48

Oh, I love hearing your voice. It's so.. it's always been reassuring through the years as I've checked in with you. Before I get talking about the march 18 lender letter, why don't you start telling your audience about what role Fannie Mae has in making standards that associations are supposed to follow.

Jodi Horne: 4:03

Sure, sure. Well, at a high level, Fannie Mae helps provide liquidity to the mortgage market by purchasing loans that meet our requirements. Those loans are packaged into securities and sold to investors, which frees up capital for banks and mortgage lenders to be able to lend more loans to consumers, so in the project space that means lenders look to our eligibility requirements when evaluating whether a mortgage secured by a unit and a condominium co-op or a PUD project may be eligible for sale to Fannie Mae, so while we don't regulate associations directly, our standards matter because they influence practices and help promote sustainable home ownership, prudent risk management, and confidence in the mortgage market.

Robert Nordlund: 4:51

Okay, I like sustainable home ownership, and I like confidence. That's a great thing. Before we get into details, tell me what Fannie Mae was trying to accomplish here. What's their. Goal with the standards, and why make a change? Just recently,

Jodi Horne: 5:05

sure. Yeah, I'm so glad you asked this. So, our goal is to support sustainable home ownership by promoting financially resilient condo projects. So, you'll hear a lot about sustainability in my comments today. We, there was a concern that underfunded reserves are often associated with critical repairs, and these can translate into high special assessments and higher dues that create hardship for unit owners and elevate mortgage risk. So, from Fannie Mae's perspective, this is really all about sustainable home ownership. When a condo project is not financially or physically sound, that risk doesn't just stay with the association, it flows directly to homeowners through higher cost financing challenges and reduced marketability.

Robert Nordlund: 5:54

Yeah, we're talking about homeowners that, if they get hit with a special assessment, all of a sudden that bump in the road makes it challenging for them to pay their mortgage that month. It's really just simple.

Jodi Horne: 6:05

It's pretty simple, and it's not just about mortgage. I mean, you think about how that flows to the whole household budget. It's really about, you know, how those families are able to weather those those challenges.

Robert Nordlund: 6:18

Yeah, it could be groceries, it could be vacations, a sustainable stable association, which is what we're trying to move towards, is a good thing for everyone involved, and boy, a lot of homeowner associations in the country, a lot of homes, and a lot of people, so it's a big deal. One thing I want to compliment you on is how Fannie Mae and Freddie Mac seem to coordinate their standards is that is that exactly the case.

Jodi Horne: 6:47

Yeah, so in this case we did take time to align our standards. They were announced by each company on the same day. We did that, so to reduce friction in the mortgage market, we don't always align on all standards, but in this case we took great care to make sure that happened.

Robert Nordlund: 7:07

Well, as a what do I say, a citizen and a homeowner and someone who lives in a homeowners association, I really appreciate that. So, thank you for having the rules the same way we get in baseball for years, there's been the National League and the American League and designated hitter rules that differ between the leagues, and that just creates confusion. Jodi, why should the average community association, or want to say a condo association, right? Okay, condo association, why should the condo association homeowner care about these Fannie Mae and Freddie Mac updated standards,

Jodi Horne: 7:45

so homeowners should care about these standards, because they affect mortgage availability, pricing, and marketability. We play an important role in the secondary mortgage market, and these requirements help lenders offer mortgage products at scale, so when product, when projects are financially stronger and better maintained, that can support both homeowner success and long-term property values, not to mention mortgage availability.

Robert Nordlund: 8:12

Okay, so we're talking about more competitive rates, which makes the home more saleable and saleable at a higher price when the prospective buyer can get a more competitive interest rate, is that kind of what boils down to?

Jodi Horne: 8:29

Yes, that can be one of the dynamics that we see play out in the market, for sure.

Robert Nordlund: 8:33

Got it. Okay. Well, tell me, from my point of view, two things changed with respect to reserve compliance. So, can you walk us through those two things?

Jodi Horne: 8:42

So, first, the minimum budgeted contribution to reserve increases from 10% to 15% of the association's budgeted assessment income. So, we're not talking special assessment income or other kinds of income, we're just looking at the budgeted special assessment income, and it's going from 10% to 15% and importantly, a large number of associations already set aside 15% or more for reserves, or they're very close to meeting this target, and then secondly, when an association is seeking to support a lower reserve amount, lower than that right now, 10% but soon to be 15% contribution. That justification for the lower reserve amount must be supported by a reserve study, and we're looking to have the lender confirm that the association is reserving the highest recommended amount in that reserve study to cover the cost.

Robert Nordlund: 9:41

I heard you say that a lot of associations are already above 15% so this change really sounds to me isn't going to affect most of the associations in the country.

Jodi Horne: 9:52

It will affect those that aren't reserving 15% so they will have to do something different going forward, but for those that are already. Meeting that requirement, there will be no impact.

Robert Nordlund: 10:03

I love that. That's the sky is not falling

Jodi Horne: 10:06

right, exactly.

Robert Nordlund: 10:08

All right, if they are not funding at the minimum, which is 10% now and 15 in the near future, when they use their reserve study published within the last 36 months. Yes. Okay.

Jodi Horne: 10:22

Yes. that's correct.

Robert Nordlund: 10:23

To say, hey, our association is special, we can get by with, you know, 8% or whatever the number is. When they're showing that reserve study, they can't use that. Now I'm stumbling on my words, they can't justify it with a baseline funding plan, because, and that baseline funding is just keeping the reserve funding barely above zero, so no baseline funding,

Jodi Horne: 10:50

correct? So adequate reserve practices are so critical to projects long-term financial and physical health, so when the reserve study flexibility is used to sidestep that 15% requirement. The lender has to verify that the budget includes the highest recommended reserve allocation that's identified in the reserve study. The key takeaway here is for your listeners is that baseline funding, which allows the reserve to get dangerously close to zero is expressly off the table.

Robert Nordlund: 11:24

Okay, but if they're funding at 18 or 25% of total budget, you would never know.

Jodi Horne: 11:31

Yeah, it doesn't. So then the lender is not using the reserve study for that purpose at that point. So, as long as they're meeting that minimum requirement, that is the lending standard, but if they're seeking to go below that, then we are looking for that reserve study, and we're looking for the association to be reserving to that highest recommended amount in the study.

Robert Nordlund: 11:53

You know, that is so reassuring, because I've heard some people concerned that lenders are now going to be half to reading a reserve study for every single loan, and I couldn't imagine that, and I'm so thankful that you, and I say you, Fannie Mae, and Freddie Mac, didn't go down that path, that it's just you set the bar, and it's an easy bar to measure where you are, are you above it, you below it, and you want to see people above that, that bar. Okay, so we talked about two changes. When do these two changes go into effect?

Jodi Horne: 12:24

Yeah, so they, the reserve increase from 10 to 15% goes into effect with the new loans on January 4, 2027 to give associations time to approve their budgets that reflect that new allocation. So, for those associations that aren't currently reserving 15% this gives them a little bit of time to go ahead and reset their budgets or get a reserve study to justify that lower amount, and then for the other change, which is when they're using the reserve study as an exception to our allocated reserve requirement amount, that change goes into effect sooner with new loans on august 3, 2026 and that's because they should already be meeting that requirement. So, if, if they are going with that lower amount, they'll just need to produce that reserve study, which is essentially what they would do today. It's just really a clarification that we're requiring that highest recommended amount versus something like baseline funding.

Robert Nordlund: 13:26

Yeah, in my words it sounds like you're starting with one of the two, you're not hitting associations both at the same time, and for associations seeking an exception, you don't want them to be, you don't want them to be using a risky methodology to establish an excuse to go below the minimum. You want substantial, cool. Okay,

Jodi Horne: 13:52

exactly.

Robert Nordlund: 13:53

I like that. So, and I also like that you give associations time to set their budget, and with so many associations on a December 30-first fiscal year end, this gives him a chance to say, okay, we were setting 11% towards reserves, and beginning in 2020-seven needs to be up to 15. It's really that simple. I love that. Okay, and this being Fannie Mae and Freddie Mac, this is national, not regional.

Jodi Horne: 14:22

That's right. So we always set our policy at a national level for our lenders and servicers, though I will say we did have some specific requirements for lending in Florida, and those are being retired or were retired with that lender letter. So now all of our condo policies really reflect the national policy. There's no regional difference.

Robert Nordlund: 14:45

That's fantastic, because after Champlain Tower South, and that tragedy that killed 98 people, there's law states reacting, and now as a reserve state provider, we're seeing a checkerboard of things, and it is reassuring to have a. Couple of national standards, Fannie Mae and Freddie Mac, saying everyone here's the bar, it's not a problem, and get everyone on board. Is it that straightforward?

Jodi Horne: 15:11

I think so. I think you're right there,

Robert Nordlund: 15:13

Jodi. Thank you so much. I look at the clock, and it's time to take a break and hear from one of our generous sponsors, after which we'll be back with more common sense about common areas.

Paige Daniels: 15:24

Are you part of a homeowners association or condominium board? Making the right financial decisions for your community's future is crucial. At Association Reserves, we're proud to serve communities nationwide, specializing in reserve studies tailored to your community's unique needs. Our expert team helps you accurately assess your property's assets, forecast future expenses, and develop a solid funding plan. Whether you're a small HOA or a large condominium association, we've got you covered. Visit reservestudy.com to learn more and get a proposal for your association.

Robert Nordlund: 15:56

And we're back. Well, Jodi, we had an interesting conversation over the break, trying to figure out what are we clearly stating, or what kind of questions have we left unanswered. So, let's start with one of the questions that we talked about, that is, was this percentage increase from 10 to 15% Was that chosen to keep things pretty easy for lenders to validate?

Jodi Horne: 16:17

The increase in budget reserves from 10 to 15% provides a modest increase to our minimum reserve thresholds that's more consistent with higher reserve contra contributions that we see many associations will need to make in order to meet their short and long term needs. What's really important for your listeners is that many associations will actually need to reserve more than our minimum threshold to maintain their physical assets over the over the long run. One of the best things that an association can do to determine how much they should be reserving is to get a quality reserve study, keep it updated, and follow its funding and maintenance recommendations.

Robert Nordlund: 16:58

Well, as a reserve study provider, I love that. So

Jodi Horne: 17:01

I knew that would make you

Unknown: 17:02

smile,

Robert Nordlund: 17:04

but one thing I liked in that to answer was again, your focus is on sustainability. What's good for the association, and you're trying to raise the minimum standards to help the sustainability of the condominium association projects all across the country. Just saying, hey guys, we can do a little bit better job, and our data supports it, and there's not much to ask.

Jodi Horne: 17:25

Exactly right,

Robert Nordlund: 17:27

a measured increase, you know, it was.. it was careful. I don't think you guys just picked it out of the air.

Jodi Horne: 17:32

We're really thoughtful about the impact that we have on the market, you know. We want projects to be sustainable, we want communities and home ownership to be sustainable, and at the same time we have to think about the impact that we have on the market anytime we make a change, whether it was this change we're talking about or any other change.

Robert Nordlund: 17:50

Yeah, you want to be careful. Well, who's actually looking at this information? This budget number that we're talking about is that Fannie Mae or is it the individual lenders?

Jodi Horne: 17:58

Both. So lenders will look at reserve studies to determine if a project's adequately funded, and also to identify red flags for critical repairs and significant deferred maintenance, which is another one of our policies that we're not really talking about today, but they'll use the reserve study to look at those factors, and we also use the reserve studies for exactly the same reason, so we have a team here that looks at condo projects in very much the same way that our lender community does.

Robert Nordlund: 18:29

You know, I think I focus so much on preparing our reserve study for the board and the homeowners, and now I'm much more aware that there's probably a whole lot of lenders looking at our reserve study too. So, their lenders are looking at the budget. Well, the budget is where they're getting the 10 or the 15% or more, right? You're trusting them to make that calculation. Yes,

Jodi Horne: 18:48

that's exactly right.

Robert Nordlund: 18:49

We're talking about the reserve say. Tell me more about the reserve say that's used if they, if the association wants to justify a lower funding amount. Tell me more about what that reserve study really is I'm a credentialed professional. Tell me more about what you're looking for.

Jodi Horne: 19:06

What we're typically looking for is that that reserve study is completed by an independent reserve study professional that can include a reserve study analyst, like, like folks that work for you, an engineer, an architect. Sometimes we see those kinds of folks doing reserve studies, so we really are looking for a professional that specializes in this kind of an analysis, and that resource study must not be more than three years old at the time that the lender is underwriting that project, so I know some state laws allow reserve studies to go out for five years for this purpose. For the purposes of our policy, it has to be within that three year time frame. I do know that sometimes you have a reserve study where there's been a site inspection, and then sometimes they'll do a follow-up adjustment to that study without a site inspection. And either of those can count, so our policy isn't specific about that, because we understand that most qualified reserve analysts will do a site inspection typically every three to five years.

Robert Nordlund: 20:13

I like that our numbers show that there's a real, there's a significant increase in special assessments among our clients when you wait longer than three years, and national best practices in the national reserve study standard says every third year. So, again, I like that there's alignment with now the lending industry on a lot of what we see when we've spoken about the highest funding goal in the reserve study. Why did you choose that or state that, rather than saying we want to see specifically X.

Jodi Horne: 20:45

Yeah, that's a really great question. You know, as I've said before, we just believe so strongly that, and the importance of projects being financially and physically sound, and so reserve methodologies that allow that reserve balance to approach zero, they don't give associations that cushion for unexpected expenses or emergencies, so that's why we went with that highest amount, and the reason why we we weren't looking at something like percent funded again, you know, our policy has historically fallen along that budgeted reserve requirement, so we wanted to stick to that, and then we thought it was more appropriate to say, okay, if the reserve study says they should have this much money in the bank by this time, that's what we're wanting to see, because we want to support that project's long-term financial success.

Robert Nordlund: 21:43

Yeah, I keep hearing the word sustainability in my brain, and this is not Fannie Mae and Freddie Mac being mean. They're just saying, hey, if you're driving a car, wear your seat belt, you're talking about take good care of your place, and don't be pursuing a risky funding plan, so just to be clear again, if there, if the association is trying to get an excuse to, or an exception to use a lower percentage of total budget than the minimum standard, if there's two funding plans suggested in the reserve study of baseline or threshold, then the lender is going to look at the threshold funding plan.

Jodi Horne: 22:26

Yes, they're going to look at the highest recommended amount, but if it just only has baseline, that would be unacceptable.

Robert Nordlund: 22:35

Got it. Okay, so baseline is automatic DQ disqualification, and same question, then, is if the reserve study has a threshold and full funding plan, the lender would look at the highest standard, because again,

Unknown: 22:49

you're

Robert Nordlund: 22:50

looking for sustainability,

Jodi Horne: 22:51

that's exactly right, and remember that reserve study for this purpose is only going to come into play when that association is not reserving net right now 10% of their assessment income, and in the future, 15% and by what we see in the industry is that most associations are going to need to reserve more than that, right? So this is this is really that reserve study really only comes into play in an exception basis,

Robert Nordlund: 23:18

right, Jodi, our data shows our association reserves data shows that the typical association needs to be funding anywhere from 15 to 45% of their budget, and so when I read this again, like I said at the beginning, this is no big deal. Most associations need to be setting aside about 25% of their budget to avoid running into special assessments. It's really that simple. So, it's just a matter of raising that minimum standard to prevent a few associations from making their own mistakes. This one, I don't know what responsibility does the association have in helping a prospective homeowner gather that necessary budget information.

Jodi Horne: 24:05

I'm so glad you asked that. The association, or its management company, is often the primary source of this type of information for the lending community, so it's really important that the association may maintain accurate records for lots of reasons, and these records, for our purposes, help to facilitate access to mortgage financing. So, if a homeowner is looking to sell or refinance their home, they may actually run into trouble with a lender if, if the lender can't get the documentation that's required to do the underwriting of the project itself, so super important for associations to do that.

Robert Nordlund: 24:50

Got it? So the associate, it's in the association's best interest to support lenders to help prospective homeowners come in. It's good for the association. Association is good for home values, that the association is doing the right thing. Okay, and again comes back to sustainability. Talk about the history of this. Was this change anticipated months ago? How long does a change like this take for you, and you, for Fannie Mae and Freddie Mac, to get it figured out? Agree, pick a date, coordinate your announcement, all that kind of stuff.

Jodi Horne: 25:23

Well, you know, there's a lot of sausage making that happens behind the season, and I think this podcast probably is not long enough to talk through all of that. But yes, these changes were in the works for quite some time. We spent a lot of time researching what we saw in the industry, talking to reserve study professionals, engineers, and others that do this day in and day out, looking at, you know, other standards, looking at state requirements. So, there was a lot of research that went into this, and it did take a while to land on the where we landed from a policy perspective, and then some coordination around stakeholder outreach, and so forth, to roll it out, but we also recognize that it takes associations a while to come into compliance with the new requirements, which is why we've given a lengthier time than we typically provide in terms of adoption of the new requirements for the lending community. When

Robert Nordlund: 26:24

I read it, I thought that's a good number. 15% just cozies up to the bottom of what we see as normal, and yeah, I appreciate the coordinated effort in getting this rolled out. And was this change driven by Champlain Tower South, and that tragic collapse, or was just part of following the data and modernizing, yeah, responding to data and modernizing Fannie Mae and Freddie Mac's safety standards, and learning what you need, learning what you know about sustainability, and just a normal update.

Jodi Horne: 27:00

So, Robert, that's a really big question, and it's a question we get a lot, so I'm really glad you've asked. There are, in fact, a lot of drivers were a change like the change changes we've made here, but the primary driver was that we saw too many associations struggle with having funds on hand to make needed repairs. You probably see this all the time, and we do too. In fact, one of the top, or the top reason I was just looking at the data around this, that a project would be ineligible for financing for our program is because they need critical repairs, and so often these repairs have gone neglected for a very long time, because the association lacked the reserve funding to move forward. It's not that you know that they're trying to neglect these issues, they simply don't have the funds on hand. So, the key goal of our reserve policy change is to put associations in a stronger financial position to address these repairs and capital improvement needs before they become emergencies that have to be funded with expensive special assessments, or before they become problems from a mortgage financing perspective.

Robert Nordlund: 28:13

Now, you got me slowing down because I'm writing notes down. I like that the reality is owning and maintaining real estate is expensive, so all you've really done, it seems like, is raise the minimum standard, and I think I captured your words to put associations in a stronger position before bad things happen.

Jodi Horne: 28:33

That's right.

Robert Nordlund: 28:34

Okay,

Jodi Horne: 28:35

that's right. And who can argue with that?

Robert Nordlund: 28:38

I hope that's the summary, and let's, let's use that to bring this program to a close. Thank you, Jodi. It was great having you on the program to share some of your insights on this important subject, helping settle people's minds, and I like it when people are able to take something complicated and explain it in a simple way. So, any closing thoughts to add at this time?

Jodi Horne: 28:59

Yeah, yeah, so you know, Robert, we've covered a lot of ground here. I would encourage folks to go out and look at our march 18 lender letter. If you're curious about our other condo and insurance eligibility requirements, all of that information can be found easily by searching online for the Fannie Mae selling guide. We publish it all there, so anyone can look at it. I would be remiss to not plug our condo status finder, which is an online tool that allows condo associations to connect directly to Fannie Mae to resolve known eligibility issues. So, a quick search for the Fannie Mae condo status finder will take you to a web page and a tool where you can research eligibility issues that your project may be having and support documentation directly to Fannie Mae to resolve those issues, so important plug there. And then after listening today, I hope associations can take a fresh on. Honest look at their long-term financial and physical health now, not when a lender or a buyer or an insurer forces the issue. That means understanding whether reserves are truly aligned with the project's physical and condition and its future needs, making sure insurance coverage is adequate and well understood by the members, staying ahead of maintenance before it becomes a crisis for the association. You know, the strongest projects are the ones that are proactive, transparent, and that are planning for long-term sustainability. So, with that, Robert, I just want to thank you so much for having me on your show. It's been a pleasure to connect with you and your audience about this really important topic today.

Robert Nordlund: 30:49

Jodi, again, it's I think our audience is so rich to be able to have someone like you on the show. Let me add a couple more things for everyone's information. I'll put a link to Fannie Mae's march 18 lending letter that Jodi referenced. I'll put that link in our show notes, and I will make sure I get a link to the condo status finder. Jodi, good idea, in the show notes. Also, okay, cool. Well, it's a treat to have influential national figures like Jodi on the program. We certainly hope that you learn some HOA insights from our discussion today that helps you bring common sense to your common areas. We look forward to having you join us for another great episode next week.

Announcer: 31:36

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