Fannie and Freddie and HOA Reserves

Yep - they will not lend unless the assoc. follows GAAP

While a reserve fund may not be legally required is is required under GAAP

(generally accepted accounting principles/practice)

Here's are some articles:

http://www.provincetownbanner.com/article/news_article/_/62634/News/12/4/2008

http://www.condo-hoalawblog.com/2008/08/articles/oregon/new-fannie-mae-condo-lending-rules/

Can't find anything yet about GAPP, but it would make sense in order to provide the full review that they are now requiring.

Joe

The article is from a reputable magazine and does not read as if it's a wish list, but fact. There is also another article on the subject posted at

http://www.condo-hoalawblog.com/2008/08/articles/oregon/new-fannie-mae-condo-lending-rules/

It has been in the news for the past few months that Fannie and Freddie are toughening up their rules to attempt to prevent the the sort of things that have contributed to their present financial mess. So, this should come as no surprise.

1. If the HOA cannot provide the data the lender requires to provide the review required by Fannie Mae, too bad. If that lender is planning on selling (or thinks that in the future it may sell) the mortgage to Fannie or Freddie, or to another lender, then they will not be able to approve the loan. The buyer will just be out of luck.

2. From the article it appears that the HOA will need to supply historical financial data and budget information to the lender. The board doesn't need to be able to determine if the budget is adequate; the lender will determine that based on the information provided. Although, the article does state that it's not clear what is meant by "adequate" or how it will be determined.

3. The article acknowledged that many HOAs don't understand or have reserves, and that many reserves are inadequate. It seems from the article that will just have to change and boards are going to have to learn to understand reserves or hire someone who does.

Don't underestimate the importance of not being able to meet Fannie & Freddie requirements. I know that from first-hand experience. When I was searching for a mortgage for my present home I was denied by one lender (and I have excellent credit) because the HOA was a new development without any financial history and it didn't have Fannie Mae approval.

Joe,

Thx for the links; however, as you say, no mention of GAAP requirements. Frankly, I'll be surprised that GAAP makes this requirement. We'll see if John will prove me wrong!

This is what I found on the FASB (Financial Accounting Standards Board) website.

Future Major Repairs and Replacements

50-2 A common interest realty association shall disclose information in its notes to financial statements about its funding for future major repairs and replacements. Disclosures about such funding shall include all of the following:

1. Requirements, if any, in statutes or the common interest realty association's documents (or mortgage or governmental bodies funding requirements, for example, Federal Housing Administration often has such requirements) to accumulate funds for future major repairs and replacements and the common interest realty association's compliance or lack of compliance with them

2. A description of the common interest realty association's funding policy, if any, and compliance with that policy

3. A statement that funds, if any, are being accumulated based on estimated future (or current) costs, that actual expenditures may vary from these estimates, and that the variations may be material

4. Amounts assessed for major repairs and replacements in the current period, if any

5. A statement indicating whether a study was conducted to estimate the remaining useful lives of common property components and the costs of future major repairs and replacements.

Common interest realty associations that fund future major repairs and replacements by special assessments or borrowings when needs occur shall disclose that information.

Required Supplementary Information

50-3 Common interest realty associations shall disclose the following as unaudited supplementary information:

1. Estimates of current or future costs of future major repairs and replacements of all existing components, such as roofs, including estimated amounts required, methods used to determine the costs, the basis for calculations (including assumptions, if any, about interest and inflation rates), sources used, and the dates of studies, made for this purpose, if any. There is no requirement for common interest realty associations to obtain studies prepared by professional engineers. The estimates may be made by the board of directors or estimates obtained from licensed contractors.

2. A presentation of components to be repaired and replaced, estimates of the remaining useful lives of those components, estimates of current or future replacement costs, and amounts of funds accumulated for each to the extent designated by the board.

I didn't post the link because you need a login for their site.

Have you noticed members that every state in the union has its own ways of doing things and its own requirements. Keep that in mind when making statements about rules and best practices

I. for one, would appreciaite some clarification on these NEW laws that Frannie and Freddie are tightening up. Am I wrong when I say that one of the crumbling stones of the lending industries was Fand F's neglect in enforceing the rules they had on the books, contributed to the sub prime mess. I think the only ones that didn't fall in line may have been FHA and VA, but I am sure there are others