Fannie Mae Rules the Day
Since the credit crisis Fannie Mae has come out with new lending regulations that are having real impact on Hoboken condo buyers. Here is a brief overview of the pertinent issues:
One entity cannot own more than 10% of the total property. This is apparently to keep one party from having too much control and risk and to prevent “vulture buyers” from taking over the property.
There cannot be more than 20% non-residental space. Most mixed commercial-residential use projects, like Maxwell Place, will be affected by this.
The Condo Association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. This is an issue in many of Hoboken’s older condominium associations. For years these associations, especially the self-managed ones, have kept woefully inadequate reserves and operating budgets. Many 2 and 3 unit condo buildings have no reserves at all.
Fidelity insurance will be required for condos with 20 or more units, ensuring that association funds are protected. This requirement is being extended to include established condominiums.
No pending litigation involving the structural soundness, safety or habitability. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.
Borrowers must obtain an HO-6 condominium insurance policy on their unit unless the condo master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. An HO-6 policy typically covers personal property, personal liability, and the physical unit from the walls and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.
The Condo Association must have adequate flood insurance. Nowadays, that means replacement value coverage. Few Hoboken condos have sufficient coverage. The buyer/borrower may be able to buy a supplement to the condo policy to close the gap in coverage.
This is just a quick overview of the current rules. Buyers often ask me what the maintenance fee includes or why it is so high. This is part of the reason. Paying a management company to professionally manage the building and be sure these requirements are properly met is another. I have seen deals fall apart every day due to inadequate reserves, insufficient flood insurance and lack of records. While it may not matter much to you as a unit owner of you’re not selling today, owning in a building with financial inadequacies hurts the marketability of your property and thus its value. So in the long run, it matters to all condo owners.