What Makes Cooperative Share Loans Different
When you buy a cooperative unit, you're not buying real estate directly. Instead, you purchase shares in a corporation that owns the entire building. Those shares give you the right to occupy a specific unit and participate in building governance.
This ownership structure creates unique lending challenges. Your loan is secured by corporate shares, not a deed to real property. If the cooperative corporation faces financial trouble, your investment could be at risk even if you make every mortgage payment on time.
Say you're looking at a co-op in Manhattan where the monthly maintenance fee covers building operations, property taxes, and the underlying mortgage on the entire building. If other shareholders default on their maintenance payments or the building needs major repairs, the financial burden could fall on remaining shareholders like you.
Why Fannie Mae Requires Special Lender Approval
Fannie Mae doesn't allow just any lender to originate cooperative share loans. The complexity and risk require specialized expertise that most mortgage companies lack.
Your lender must demonstrate substantial experience with cooperative projects in your specific geographic market. They need dedicated staff who understand cooperative financial statements, bylaws, and governance structures. The lender must also maintain written policies for evaluating cooperative projects that meet Fannie Mae's standards.
This approval requirement protects both you and Fannie Mae. A lender without cooperative expertise might approve a loan on a financially unstable project, leaving you with an unmarketable asset.
How Lenders Evaluate Cooperative Projects
The lender examines the cooperative corporation's financial health just as thoroughly as your personal finances. They review the project's marketability, physical condition, and financial stability.
The evaluation covers several critical areas. The lender assesses whether units in the building sell readily and hold their value. They examine the cooperative's reserve funds, maintenance fees, and any pending special assessments. They also review any litigation involving the building or the cooperative corporation.
A cooperative with declining unit values, insufficient reserves, or ongoing legal disputes might not qualify for Fannie Mae financing. The lender needs confidence that your shares will serve as adequate collateral throughout the loan term.
Required Documentation for Cooperative Projects
Your lender will request extensive documentation about both you and the cooperative. For the cooperative itself, they need current financial statements, budgets, and reserve fund reports. They'll review the cooperative's bylaws, proprietary lease, and any amendments.
The lender examines the building's physical condition through engineering reports and inspection records. They verify that the cooperative maintains adequate insurance coverage for the entire property. Any pending litigation or special assessments must be disclosed and evaluated.
You'll provide standard mortgage application documents plus cooperative-specific items. This includes your proprietary lease, the stock certificate representing your shares, and any cooperative board approval letters required for the sale.
Established vs New Cooperative Projects
Fannie Mae only purchases loans on established cooperative projects. An established project must be complete with no additional construction phases planned. The original sponsor or developer must have turned control over to the unit owners.
This requirement eliminates the risks associated with incomplete developments. New cooperative projects face construction delays, cost overruns, and uncertain marketability. The sponsor might retain too much control or hold too many unsold units.
If you're considering a newly converted rental building or a cooperative still under developer control, you won't qualify for Fannie Mae financing. You'll need to wait until the project meets the established criteria or seek alternative financing.
Critical vs Routine Repairs
Fannie Mae distinguishes between critical repairs that threaten the building's viability and routine maintenance items. Critical repairs include structural problems, safety hazards, or any issue costing more than $10,000 per unit that needs attention within 12 months.
Examples of critical repairs include failing elevators, waterproofing problems, foundation issues, or electrical system failures. These problems can affect unit values and the cooperative's financial stability.
A building with unfunded critical repairs might not qualify for Fannie Mae financing. The lender needs assurance that the cooperative can maintain the property without imposing excessive financial burdens on shareholders.
Common Complications and Red Flags
Several situations can derail cooperative share loan approval. High concentrations of investor-owned units create instability since investors may be less committed to building maintenance and governance.
Declining market trends in the area raise concerns about unit marketability. If similar cooperative units aren't selling or are losing value, your lender might question whether your shares provide adequate collateral.
Financial problems within the cooperative corporation present serious obstacles. This includes insufficient reserve funds, delinquent maintenance payments by other shareholders, or pending special assessments for major repairs.
Legal issues can also block approval. Ongoing litigation involving the building, disputes between shareholders and the board, or regulatory violations create uncertainty about the cooperative's future.
The Blanket Mortgage Factor
Most cooperative buildings carry a blanket mortgage that covers the entire property. This underlying debt affects every shareholder since the monthly maintenance fee typically includes a portion of the mortgage payment.
If the cooperative corporation defaults on the blanket mortgage, the entire building could face foreclosure regardless of individual shareholders' payment history. This risk makes lenders particularly cautious about the cooperative's overall financial management.
Your lender will examine the terms and payment history of any blanket mortgage. A cooperative with a history of late payments or an upcoming balloon payment might not qualify for Fannie Mae financing.
References
For the official guidelines, see 5705.1: Cooperative Share Loans in the Fannie Mae Selling Guide.
Mortgage guidelines change. Stay current.
Fannie Mae and Freddie Mac update their rules several times a year. Get notified when changes affect your mortgage eligibility, required documents, or loan terms.
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Original Freddie Mac Guideline Text
Freddie Mac purchases Cooperative Share Loans secured by an ownership interest in Cooperative Projects that meet Freddie Mac’s eligibility requirements. This section contains requirements related to:
Seller’s assessment of Cooperative Project risks
Seller approval for Cooperative Share Loans
Glossary definitions and other terms used in this chapter
Sellers must obtain written approval to be eligible to deliver Cooperative Share Loans to Freddie Mac. A Seller should contact its Freddie Mac representative or Customer Service at 800-FREDDIE to discuss how to obtain the applicable term of business. Freddie Mac reserves the right to cease approving Sellers or accepting deliveries of Cooperative Share Loans from any or all Sellers.
The term “Mortgage” as used in the Guide includes, as the context requires, the term “Cooperative Share Loan.” Requirements pertaining to Mortgages apply to Cooperative Share Loans.
(a)
Seller’s assessment of Cooperative Project risks
Freddie Mac requires a Cooperative Project review to address certain project risks, including, but not limited to:
The marketability and condition of the project
The marketability of the units within the project
The financial stability and viability of the project
Project-level litigation
Restrictions on Shareholders’ rights to occupy the unit; and
The adequacy of insurance coverage to protect the project from damage and loss
Freddie Mac expects the Seller to have staff that is experienced and knowledgeable about Cooperative Project risks and to place as much emphasis on the adequacy of the Cooperative Interest as collateral as it does on underwriting the Borrower’s creditworthiness. The quality of a Cooperative Share Loan can be impacted by the financial stability and viability of the particular project, among other project characteristics.
The conclusion that a Cooperative Share Loan is acceptable to Freddie Mac must be based on the determination that the Borrower is creditworthy and the Cooperative Interest in the Cooperative Corporation is adequate collateral for the Cooperative Share Loan transaction.
(b)
Seller approval for Cooperative Share Loans
To be approved to sell Cooperative Share Loans, Sellers/Servicers must meet minimum requirements to be considered for approval to sell Cooperative Share Loans, including:
Possess sufficient expertise with Cooperative Projects and Cooperative Share Loans, along with the capacity and resources to ensure that the Cooperative Project is likely to be successful does not expose Freddie Mac to material credit risk and meets eligibility requirements
Possess substantial experience in the geographic market in which Cooperative Share Loans are being originated
Demonstrate volume of Cooperative Share Loans correlates to years of experience
Engage dedicated project review staff with experience in underwriting Cooperative Projects, and retain legal counsel (or have access to legal counsel) familiar with Cooperative Projects and Cooperative Project eligibility requirements
Maintain written policies and procedures consistent with Freddie Mac’s project eligibility requirements. The policies and procedures must address pre-sale and owner-occupancy requirements, declining market trends, project completion and any other issues that layer additional risk for Cooperative Share Loans. The policies and procedures for identifying the Cooperative Share Loans to be sold to Freddie Mac may be no less stringent than the policies and procedures for the Seller’s investment decisions.
Maintain controls for monitoring performance of Cooperative Share Loans it originates (e.g., a 60-day Delinquency within the first three months or any 90 or more day Delinquency ever). Sellers must also maintain policies and procedures to implement default management corrective actions that also evaluate and monitor the performance of the Cooperative Share Loans following implementation of such corrective action. Seller/Servicer must not be aware of any quality or servicing issues related to the Cooperative Share Loans it originates.
Provide project-related reporting and any project underwriting documentation or Cooperative Project Documents upon request from Freddie Mac or request the documentation from the Cooperative Corporation on Freddie Mac’s behalf, if applicable
(c)
Glossary definitions and other terms used in this chapter
(i)
Glossary definitions
The Seller should be familiar with Freddie Mac’s
Glossary
definitions of the following terms:
Glossary definitions for Critical Repairs and Routine Repairs
Critical Repairs
(includes material deficiencies and significant deferred maintenance)
Repairs and replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building(s) and/or that impact unit values, financial viability or marketability of the project.
These include:
Material deficiencies which, if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year
Any mold, water intrusions or potentially damaging leaks to the project’s building(s) that have not been repaired
Advanced physical deterioration
Any project that failed to pass state, county, or other jurisdictional mandatory inspections and/or certifications specific to structural soundness, safety, and habitability; or
Any unfunded repairs costing more than $10,000 per unit that should be undertaken within the next 12 months (does not include repairs made by the unit owner or repairs funded through a special assessment)
Examples of some items to consider include, but are not limited to, sea walls, elevators, waterproofing, stairwells, balconies, foundation, electrical systems, parking structures or other load-bearing structures.
Routine Repairs
These repairs are not considered to be critical and include work that is:
Preventative in nature or part of normal capital replacements (e.g., focused on keeping the project fully functioning and serviceable); and
Accomplished within the project’s normal operating budget or through special assessments that are within guidelines
(ii)
Other terms used in this chapter
The following additional terms are used in this chapter:
Blanket Mortgage
A Mortgage secured by a Cooperative Project; is also referred to as an “underlying mortgage.”
Established Cooperative Project
An Established Cooperative Project is a Cooperative Project in which:
The Cooperative Project is complete, and is not subject to additional phasing, and
The sponsor/developer (or Holder of Unsold Shares) has turned control of the Cooperative Corporation over to the Cooperative Unit owners
Holder of Unsold Shares
Any of the following persons or Entities that (a) hold Cooperative Shares in Cooperative Units, (b) except as described below, do not intend to cause the Cooperative Units to be occupied and (c) intend to lease the Cooperative Units or keep the Cooperative Units vacant:
Sponsor/developer
Persons/entities that the sponsor/developer designates as holders of unsold Cooperative Shares; and
Subsequent transferees of such unsold Cooperative Shares which retain their character as unsold Cooperative Shares until one of the occupancy events described below occurs
For purposes of this definition, intending to cause the Cooperative Unit to be occupied means occupancy by the persons holding the Cooperative Shares in the Cooperative Unit (i.e., subsequent transferees) the principals of an Entity holding such Cooperative Shares or any family members of the persons holding the Cooperative Shares, employees or persons affiliated with such Entities holding the Cooperative Shares.
New Cooperative Project
A New Cooperative Project is a Cooperative Project in which:
The Cooperative Project is not complete, or is subject to additional phasing, or
The sponsor/developer (or Holder of Unsold Shares) has not turned control of the Cooperative Corporation over to the unit owners
