Robert Nordlund: 0:00

Fannie and Freddie want to know how the association is doing because when I heard about the tragic collapse of Champlain Tower South, I thought, "Oh no, there's probably a lot of people that have lost their lives there. And we did learn that 98 people lost their lives. What the lenders learned is that 134 of their mortgages lost the security because the building went away. The building, as you and I know, got bulldozed. So Fannie and Freddie, when they say these are our standards, everyone turns around and listens, and it does create shockwaves. And they have raised the standards, and because they're the lender, they get to make the rules.

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Robert Nordlund: Welcome back to HOA Insights: 1:00

Common Sense for Common Areas. I'm Robert Nordlund, and I'm here today for episode number 179 with something we don't do too often-just some news for you in my area of specialty. I've had reporters recently reach out to me, CAI chapters and other industry professionals reach out to me to learn what's going on with Fannie Mae and Freddie Mac revising and tightening their lending requirements with respect to reserve funding and reserve studies? So, as long as I've been answering those questions to all those different people in all those different places, my staff recommended that I do a podcast episode to make sure you had all the right information on what's going on with reserve funding and lender compliance? So, for you new listeners, I want to let you know that this here is a weekly program with new episodes each week, dropping on our website hoainsights.org, on all the major podcast platforms, and on our YouTube channel. We regularly feature discussions among our co-hosts, insurance expert Kevin Davis of Kevin Davis Insurance Services, and management and leadership expert Julie Adamen of Adamen Inc. We also feature discussions with subject matter experts on fields that are important to your role leading your association forward. I have a number of signed books from those experts on my bookcase, and we also regularly have episodes featuring an actual board member, so they can tell their story of the things that they've been doing at their association that you can relate to and learn from. Last week's episode was one of those board hero episodes, episode number 178, and we heard from Sherry Fassett, and was able to tell her what I thought was a fascinating story about trying to keep her problems small, let not letting them grow on her. Well, we enjoy hearing from you, responding to the issues you are facing at your association. They help shape the episodes that we do. So it's those kind of questions that have driven this episode. So, if you have a hot topic, a crazy story, or a question you'd like us to address in a future episode, you can contact us at 805-203-3130, or email us at podcast at hoa insights.org. But again, today's episode is all on me. There are some lending standards that have changed. Now I'm talking about mortgage lending, not a loan for your association. I want to say regular old mortgage lending, so when Unit 13 sells, that new buyer can get a mortgage. There are some lending standards that have changed that you need to know about in a timely manner. I'm recording this in early September. It will be produced September or October, I believe, and distributed. They've had one change of the two-part change that's already passed, and we got another one coming in January. And I just think the podcasts. I agree. The podcast is a great way to get this news out, both to you, our listeners, and everyone you share this program with. is a great resource. We've got great things going on here at HOA Insights, Common Sense for Common Areas. We have merch that you can grab at our website hoinsights.org, or the show notes and free good stuff there, like board member Zoom backgrounds. So it's not all things for sale, but truly, there's been some real rumblings in the lending industry that have caused shockwaves throughout the community association industry, and they are changes made by Fannie Mae and Freddie Mac. And so I've got some notes here, actually some excerpts from answers I've given and articles I've written. But the first thing you need to know is who is Fannie and Freddie. Who are they, and why do I care? Fannie Mae and Freddie Mac are two large government-sponsored enterprises, GSEs, and they purchase approximately 70% of horn mortgages in this country. Okay, and they purchase the mortgages from banks and other lenders, and so those banks can get cash, which they then lend to consumers like you and me. So Fannie and Freddie fuel the mortgage industry. They are essential to mortgages and home ownership in the United States. So they buy loans from lenders, and lenders go off and do what they do. It's like they they sell loans. Fannie and Freddie takes her inventory and moves on. But in the olden days, the best way for you or I to get a mortgage was to, of course, have a strong FICO score. And Fannie and Freddie knew that the status of the association was involved, but it wasn't all that significant. They felt that the what's the worst that can happen? Maybe the owner gets a special assessment once every few years. No big deal. Well, with the collapse of Champlain Tower South in 2021, and with the significant inflation that we've had for a few years, and the significant increase in insurance costs, the bills are getting pretty high for community associations. And now, Fanny and Freddie want to know how the association is doing because when I heard about the tragic collapse of Champlain Tower South, I thought, "Oh no, there's probably a lot of people that have lost their lives there. And we did learn that 98 people lost their lives. What the lenders learned is that 134 of their mortgages lost the security because the building went away. The building, as you and I know, got bulldozed. So Fannie and Freddie, when they say these are our standards, everyone turns around and listens, and it does create shockwaves. And they have raised the standards, and because they're the lender, they get to make the rules, it's their money, it's their rules, and it's pretty much as simple as that. So that is the who is Fannie and Freddie, and why do they matter? They lend the money, and the lender dictates the terms. And so there's two stages. Fannie and Freddie have standards for all the lenders, and the lenders have to at least meet those standards with the mortgages they want to sell over to Fannie and Freddie. Okay. Now, why are they doing this? Well, it's all about sustainability. They want the property to continue to be there and not disappear like it did at Champlain Tower South, and they want the mortgage payer, the homeowner, to have the cash flow to be able to pay their mortgage. They don't want a special assessment of what we're hearing now-10 or 50 or $100,000-to make it so they're just going to walk away and default on the loan, or have a hard time paying their mortgage, things like that. So Fannie and Freddie have a virtuous objective. They want what's good for the association, and they want what's good for the the home buyer. They want stability. There's a number of good news pieces. I want you to make sure that you understand that one is that Fannie and Freddie have kept their standards similar. They compare notes, and the standards are identical. That's one good thing. Another good thing: they're nationwide standards. It's not the checkerboard of reserve study legislation that we see across the country, and their changes are indeed minor, and not only are they minor, but they've made their changes with respect to reserves in two stages. And part one, change number one, began in August 2026, and it tightened up the standard by which associations request an exemption to their minimum percent of budget funding requirement. Now I should back up. All their lending standards apply to condominium associations and co-ops. They do not apply to single-family home associations, where the only common area is maybe the roadway, the gate, the tot lot, the clubhouse, things like that. These lending standards only apply to condo and co-ops where the residential structure is involved. That's because the common areas are so much more significant in those types of associations. So, part one began in August 2026, tightened up the standard by which someone would request an exam. And you say the exemption from what? As we speak, the minimum standard for funding reserves is 10% of budget, and that's pretty darn simple. When I first learned of that standard many years ago, I thought it could be so much better. They could be looking at the percent funded. They could be looking at so many other parameters, but you have to think like a lender here. They want to process a loan. They want to get it out. So 10% of budget is a wonderfully simple number. If your budget is $500,000 per year, they want to see at least in your condo. They want to see at least 50 grand going to reserves. Easy. Every association has a budget. Every lender can hire someone to make a 10% calculation. No big deal. But Champlain Towers South met that 10% of budget minimum requirement, and we all know what happened to them. 10% was not enough. In case you or anyone else wants to get an exemption from their minimum standard, which is today 10% of budget, you can appeal it, and you can appeal it showing a reserve study that has been prepared credibly within the last and dated within the last three years, and you could use that to say,"Hey, our reserve site says we only need to fund $6,000 a month, and that is to make the numbers easy, 6% of our total budget. Okay, you used to be able to do that. Now, what they tightened up is Fannie and Freddie are caring a little bit more about that request for exemption, and they're saying we're no longer going to look at a request for excuse using a baseline funding plan. Baseline funding plan is where the reserve fund can approach zero. I'm doing this with my hands, so you on who are listening aren't seeing all my hand motions. But baseline funding is indeed a minimum standard. Where the minimum standard is there is still cash in reserves. You haven't gone through it all. It's very risky because anything that goes out of balance, an expense that is a little bit higher or a little bit earlier, means that the association won't have enough money. And Fannie and Freddie want sustainability. They want associations with enough money to take care of the place. So they've said if you're going to request an exemption, it has to be using the highest funding plan in that reserve day that you have. Baseline not included. So basically, what they've done is say that you can't use a minimum standard as an excuse to pay our minimum standard, so no more baseline funding as of August 2026. So that schedule has already crossed. The other change is phase two, and looking at my notes here, this begins in January 2027, actually January four, where the minimum percentage of budget for condominium associations funding reserves increases from 10% to 15% not a big deal, but a 5% increase. And what's important about this is you have to appreciate that we know at association reserves the average condominium association needs to be setting aside about 25 percent of its budget towards reserves to have enough money to maintain the place and not be special assessing the owners. And so Fannie and Freddie's increase from 10 percent to 15 percent is really just a tweak, and it's only aimed at the non-conforming boards who are emphasizing minimum funding of reserves. Fannie and Freddie want sustainability, so they want to say,"Hey, folks, let's get it together. You need to be in the ballpark. And they've changed the rules so that ballpark is now starts at 15% So, for those of you saying that this change of some government-sponsored enterprises far away from me is going to make my life 5% more expensive, I say no, because your cost of running things and sustaining your association is driven by Mother Nature and Father Time, not Fannie Mae or Freddie Mac, and they are undefeated since the beginning of time, and they don't negotiate with associations that claim to have a tight budget or want an exception. So, if you think that it's going to become 5% more expensive, you're wrong because those costs are still there. That increase from 10% to 15% of your total budget only means that future special assessments will be smaller. Or less frequent, you'll most likely still have special assessments, but they're forcing some of your funding into the ongoing monthly budget. So you're saying, okay, does that really have to happen? And the answer is yes, it really has to happen. That's one of those easy things that, if you go back to school, the teacher would say,"Everyone done with the test. Pencils down. It's easy to see who's compliant, who's not, and the other part of that is understanding that these are minimum standards for Fannie Mae and Freddie Mac. Lenders are still free to say, "Hey, and I'm wringing my hands here. It's our$500,000, or $100,000, or 2.7 million, or whatever that we're lending to this nice family or this nice person. We want to make sure we're getting paid back over 15 or 20 or 30 years, we're going to insist on A and B and C and D, and that may mean some definition of adequacy-a percent funded. That may mean looking at your reserve study. That may mean checking actual to budget to make sure you're actually making those reserve transfers. All those kinds of things. So the lenders are still free to have a higher standard than the the 15% So it is going to happen. It's real. The costs are real. And let me leave you the one more thing before I take a quick break for a sponsor ad, and that is understanding that January 2027 is going to come very soon, and so for everyone working on a calendar year budget, it's pretty easy. Just every condo association listening needs to understand that you need to have at least 15% of your budget going towards reserves. Period. Make sure that they can check the box very easily. Round it up a few dollars, so they're not having to get their calculator out and working too hard. Make sure that you're doing that. Now, the interesting question is for associations that have, let's say, a September one fiscal year start, or maybe a June or July one fiscal year start in January. They're going to be looking to see if you're above the 15% line or not. So, if you are, if you have a off fiscal year start that is different than December, excuse me, January one, you need to care about this now. If your budget year for a condo started July one, you need to look right now and make sure you're above 15% If not, you better change your budget right now. The consequences are too significant. It means that 70% of the people interested in buying a home at your association won't be able to, and it's a very change from the olden days when to get a good loan, all you needed to do was have a strong FICO score. Now, the association needs to be part of the qualification standard. You can have an 800 FICO score, and if the association doesn't qualify, the lender won't lend, and that's just the reality that we have here. So you can do a simple thing by making sure that your association is at or above 15% of budget going to reserves. And let me add an asterisk to that. We find that for single-family home associations, the same is generally true. That you need to be setting aside about 25% of budget towards reserves. So while Fannie and Freddie may not care, the free advice you can get on this podcast is that look at your budget, see if you're well above 10 or 15% going towards reserves. You start to feel good about life, and lack of special assessment when it gets more like 2025, 30% That's your homework for after this podcast. And at this point in time, I'm going to take a quick break to let you hear from one of our generous sponsors. After which, I'll be back with more on this topic about the new lending reality for condominium associations. Basically, helping you have the insights that you need to have more common sense about your common areas.

Paige Daniels: 19:25

Numbers matter, and we need numbers like game scores and bank balances to let us know where we stand. The same is true for your association: is yours thriving or struggling? Let me introduce you to the FiPhO health score, like your own personal FICO credit score. Now, in one simple number. Owners and boards can learn the combined financial, physical, and operational health of their association. The good news: it's free at ourfipho.com That's our f-i-p-h-o.com. Learn how your association measures up.

Robert Nordlund: 19:56

And we're back. Well, right before the break, we're talking about the new 15th. Minimum standard for condominium associations for funding reserves, and I just want to make sure on two things. One thing is your question. Jeez Louise, that sounds hard. Is it really 15% And your guys are going to know this. The simple answer is 15% but there is a little asterisk on that. The 15% of budget is 15% out of not the total budget, but just about everything except the reserve funding. So you can make your total budget a little bit smaller, which makes it easier to hit 15% with a lower number. Okay, so yes, I you can go to our website. We have some links on that, and I will put a link in the show notes on how you can read about that. But remember, that requires math and understanding on the part of the lender, and it requires math and understanding on the part of the board, and likely a discussion between the two, and all while the unit owner of unit number 13 is trying to sell their unit and asking you what the problem is and why you didn't make it easy for them. But I want to make it clear that you're missing the point. Remember that before the break, I said that your association likely needs about 25% of budget to pay for everything that's there at the

association: 21:34

all the maintenance on the roof, the paint, the asphalt, the pool, the elevator, the carpet, the exercise room, all those kinds of things, the pool deck, the air conditioning, the hot water system, whatever is there. Whether you're a townhouse association, mid-rise, high-rise, any condo, your job as a board member, as a fiduciary, is to provide for the needs of the association to budget, and you know that you've got an operating budget, and you've got a reserve budget, and I want you to start thinking and using the words. Both of these are current costs. A operating budget clearly has a current cost. Every month, you get a bill for electricity, water, the pool service, the management company, all those kinds of things. So the current costs. Too many times, people think about reserves as something for the future. It's a roof in seven years or 13 years or whatever. That's incorrect. Reserve funding is the deterioration cost. It's a usage cost for all those common area assets that are deteriorating a little bit each day, week, and month. It is the current cost of deterioration, and it's the board's obligation to pay that current cost of deterioration of reserve components, just like the board's obligation to pay the current cost of things in the operating budget. So, think about that as I transition to the idea of what are we going to tell our homeowners, and how do we react to this? Well, number one, look at your budget, and the vast majority of condominium associations out there are likely already funding well over 15% If you are responsibly funding reserves, looking at your reserve study, and following that, you're likely funding well over 15% This may, this whole fuss may not apply to you. I am talking to the associations that are doing their level best to do everything they can to minimally fund reserves and create special assessments for their homeowners, because again, underfunding reserves has nothing to do with costs. The costs are driven by Mother Nature and Father Time, not how much money you put into reserves. The roof is still deteriorating. The asphalt is still deteriorating. You can ignore it, but they don't care. And there's stories in the news. I'll probably have one in the show notes about a recent association that just got a $27,000 special assessment or levied a$27,000 per unit special assessment for roofing. Their units at their condo association have a lot of tile roofs. It's a condo association. It's not a HOA or planned development, and they just ignored it for 30 years. And again, the sun and the moon and the weather-they really don't care. It was a bill that they had failed to pay for 30 plus years, and the bill finally came due. It's like living on credit cards. It's wonderfully simple. It's wonderfully inexpensive, until the bill comes due. So, your action, if you are below that level, number one, raise your assessments. If you are below that level and your fiscal year end is other than December. 31st, make a change right now mid year because by january 4 of 2027, mortgages are not going to start being approved at your association, and that is going to tank community spirit, and that is going to tank property values, and that's just a bad thing going on. Okay, so what to do? Raise assessments. As you raise assessments, you need to communicate effectively to your homeowners. You're not the bad guy. Fannie Mae and Freddie Mac are not the bad guy. It is just plain expensive to own a home nowadays, and we're just spreading the costs out. These are the very real costs. You can't see a reserve study, if you don't have one within the last three years, of course, my recommendation is to get one so you know what to do. But at least fund the minimum, because you can say that this is going to reduce the frequency and size of future special assessments, and it is not for the future. We are paying the ongoing cost of deterioration that is occurring this year. You will have people who say, "I'm not going to be here in seven years when the roof needs to be replaced, and you say,"Fine, we're sorry to see you go, but while you're here, you need to be paying your fair share of the deterioration bill. It's a usage fee for using up some of the life of the roof while you've been here, make sure that you are communicating that effectively to your board, and then collect those assessments. It means nothing if you budget for reserve funding and don't have the budget to make those transfers. So make sure that you're actually budgeting accurately for the other things that you have to pay, and make sure that you're collecting those assessments, that you have a good collection policy, that you have supporting a legal or accounting or there's specialized companies out there that that's all they do. They help you collect and maintain your cash flow. So make sure that you have the systems set up so that that can happen, and that everyone understands that oh darn owning a home is expensive, and underfunding doesn't save us any money because the roof is still going to fail, and we all need to pay pay our fair share of that cost. And so, me or someone else will not get hit with an unfair special assessment for all the deterioration that occurred while I was a homeowner at the association. So that's the essence of what I want to cover here: the new lending reality for condo associations, the no baseline funding exceptions, no using the minimum standard to request an exception from a minimum standard, and the Fannie Freddie minimum climbs to 15% and it's a wonderfully simple thing for any lender or lending agent to be able to calculate. And remember that the lenders are free to hold higher standards. They may, if if I was a lender, I would hold higher standards because I want to get paid back on my loan, and you would too. And you know the insights of what's going on at your association. You know, uh-oh, we don't have enough money. We'll probably need a special assessment in a few years, and there's probably a few people that won't be able to pay that. You and I know that, so let's be realistic. And what I want to leave you with is let's fund honestly and avoid a crisis, so it all boils down to doing the right things, the things that are already likely required very clearly in your governing documents. So thank you for joining me today, allowing me to share my experience with reserve costs, reserve funding, and having worked with Fannie and Freddie leadership for years on these issues and helping them craft workable minor steps of change that won't rock the industry too much. Sustainability of the property and the owner's financial situation is in everyone's best interest, which means that funding reserves honestly is the right thing to do, so you don't create a crisis now or in the near term. Mother Nature and Father Time are unstoppable forces. Fortunately, in the field of reserves, you can see the expenses coming, so you can prepare. Well, I certainly hope that you learned some HOA insights from today's episode, today's program that helps you understand the significance of your budget decisions at this time to prepare you for next year, and I hope that gives you an advantage to other associations that are unawares. I hope it brings common sense to your common areas. If you know of other associations that are unaware of this issue, please share this podcast with them. Is what we try to do week after week after week, and we look forward to having you join us for another great episode next week. Thank you very much.

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Insights: 30:13

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