Project litigation is one of many risks when evaluating a mortgage application for a condo unit.

Since 2010 Fannie Mae has had roughly the same litigation guidelines until January 30th, 2018.

The new guidelines finally give lenders a way to close condos with pending litigation.

So what took so long? Here’s the backstory, first, followed by the rebound and finally, the resolution.

Hopefully, this will now provide Loan Officers the freedom to close more condos under litigation.

The BACKSTORY

On December 1st, 2010, Fannie Mae published their Selling Guide updates. One of the updates involved project litigation for condominiums, co-ops, and attached PUDs. They noted, "Currently, mortgage loans in projects with any type of litigation are ineligible for delivery."

That's right! That's what they said! Why would they not allow any litigation at all?

Well, this is after what is now called The Great Recession. Robert Rich writes, "The Great Recession began in December 2007 and ended in June 2009, which makes it the longest recession since World War II."

Fannie Mae and Freddie Mac were placed into conservatorships and remain there until this day by the authority of the Federal Housing Finance Agency. The FHFA writes, "On September 6, 2008, with the consent of both Fannie Mae's and Freddie Mac's board of directors, FHFA used its authorities to place each Enterprise into conservatorship. FHFA established two conservatorships in response to a substantial deterioration in the housing markets that severely damaged each Enterprise's financial condition and left both of them unable to fulfill their missions without government intervention."

The REBOUND

Therefore, at this time, Fannie Mae and Freddie Mac aimed to rebound from this recession period and look forward to the future of a strong housing market. Project litigation is one of many risks when evaluating a mortgage application for a unit located within these projects. It is surprising that Fannie Mae would not allow any litigation since litigation is very common within these types of projects.

People live in close proximity to one another, sharing walls and amenities. To illustrate, I once had pending litigation in a project where an inspector claimed that he had been attacked by a Bobcat! After reading the sheriff's report, it turned out that the "Bobcat" was actually a domesticated house cat, or in Latin, Felis catus, as described in the report. You never know what you'll come across in these projects! Litigation occurs everyday and as one Fannie Mae project standards expert recently and accurately noted, "We live in a litigious culture."

Fannie Mae recognized that they had to provide a way out for lenders. Lenders were not able to warrant projects and experienced difficulty in determining whether the mortgage transaction was eligible based solely on pending litigation in a project. Going back to the 2010 Selling Guide update, Fannie Mae writes, "Litigation, however, can vary from having no impact on the project to having a major impact on the project. In recognition of the various types of litigation and potential impact to a project, the current policies related to litigation are revised." Read the updates here.

The RESOLUTION

Fannie Mae has finally updated their litigation requirements on condominium projects! The guidelines now allow the lender more flexibility to determine, with confidence, whether litigation is minor or major, what is considered minor, and provide a way for lenders to warrant the project despite the litigation. Fannie Mae and Freddie Mac consider any condominium project ineligible if there is any litigation for the project, not only the unit, "that relates to the safety, structural soundness, habitability, or functional use of the project."

However, what is considered minor may flirt with some of the previous statement, but it is all circumstantial! The lender must research the litigation! For example, if damage had occurred to a particular unit(s) but has been repaired, no longer affects the project as a whole or the unit owners, and does not financially impact the HOA, then why shouldn't the lender be able to warrant the project?

Fannie now provides a way out. "Litigation concerning localized damage to a unit in the project that does not impact the overall safety, structural soundness, habitability, or functional use of the project" is now eligible. Lenders can underwrite these circumstances confidently and conclude their case. The below lender alternative has become my favorite and provides the lender with a wide range of flexibility in concluding the litigation and warranting the project:

"...the HOA or co-op corporation is the plaintiff in the litigation and upon investigation and analysis the lender has reasonably determined the matter is minor and will result in an insignificant impact to the financial stability of the project."  

Please click here to read all of the new lender alternatives for warranting a project that is pending litigation. Lenders now have more power than ever to warrant these projects! Please remember, Fannie Mae cautions lenders that they, "must obtain documentation to support their analysis that the litigation meets Fannie Mae’s criteria for minor litigation."