What Makes a Cooperative Project "New" and Why It Matters
When you're buying into a cooperative that Fannie Mae considers "new," your lender faces additional scrutiny. A new cooperative project is one that hasn't been previously approved by Fannie Mae or doesn't meet their established criteria for existing projects.
Say you're looking at a recently converted rental building in Manhattan that's now operating as a cooperative. If this is the first time someone is getting a Fannie Mae-backed loan in this building, it's considered a new cooperative project. Your lender must verify that the entire cooperative structure meets Fannie Mae's legal requirements before they can approve your loan.
This process protects both you and the lender. Cooperatives operate differently than condominiums or single-family homes, and Fannie Mae wants to ensure the legal framework won't create problems down the road.
Legal Formation and Compliance Requirements
The cooperative corporation must be properly formed under state law and maintain compliance with all applicable regulations. This isn't just about having the right paperwork filed years ago when the cooperative was created.
Your lender will verify that the cooperative corporation remains in good standing with the state. They'll check that all required annual filings are current and that the corporation hasn't violated any local housing laws or building codes.
For example, if you're buying into a cooperative in Chicago, the lender will confirm the corporation is properly registered with Illinois and hasn't received any violations from the city's housing department. Any outstanding legal issues could prevent Fannie Mae from purchasing your loan.
Rights of First Refusal and Approval Processes
Many cooperatives retain the right to approve new buyers or offer existing shareholders the first chance to purchase when someone sells. Fannie Mae allows these practices but sets strict limits on how they can be implemented.
The cooperative cannot use these rights in ways that could be interpreted as discrimination. They also cannot create approval processes that make units difficult to sell or transfer.
Consider a cooperative board that routinely rejects buyers without clear, documented reasons. This pattern could impair the marketability of units and violate Fannie Mae requirements. The lender will review the cooperative's bylaws and recent board minutes to ensure approval processes are fair and transparent.
Shareholder Rights and Document Amendment Powers
Shareholders must have meaningful control over their cooperative. This includes the right to amend the cooperative's governing documents through a democratic process outlined in the bylaws.
The cooperative cannot be structured in a way that gives the sponsor, management company, or a small group of insiders permanent control over major decisions. Shareholders need the ability to change rules, replace management, or modify the cooperative's structure if needed.
Your lender will review the cooperative's articles of incorporation, bylaws, and proprietary lease to confirm these rights exist. They'll also verify that any required percentage of shareholder votes for amendments is reasonable and achievable.
Required Notifications to Lenders
The cooperative corporation must agree to notify your lender about specific problems that could affect your loan or the building's financial stability. These notifications aren't optional suggestions - they're legal requirements.
The cooperative must inform lenders about condemnation proceedings, loss of tax benefits, mortgage payment defaults, insurance lapses, and shareholder delinquencies over 90 days. They must also notify lenders before taking any action that requires lender consent.
For instance, if the cooperative's underlying mortgage goes into default or the building loses its insurance coverage, your lender must be notified within the timeframes specified in the recognition agreement. This gives the lender the opportunity to protect their interest in your loan.
Membership and Transfer Requirements
The cooperative's governing documents must allow shareholders to pledge their shares as collateral for their loans. This seems obvious, but some older cooperatives have restrictions that conflict with modern mortgage lending.
The documents must also comply with federal and state securities laws when shares are sold or transferred. Your lender will verify that the cooperative has proper disclosure procedures and that share transfers follow legal requirements.
The cooperative cannot impose unreasonable restrictions on your ability to sell your unit. While they can maintain approval processes and financial requirements for new buyers, these cannot be so burdensome that they effectively prevent sales.
Lender Protection Rights
Your lender must have specific rights to protect their investment if you default on your loan. The cooperative must agree to evict you and terminate your proprietary lease at the lender's request and expense if you stop making loan payments.
The cooperative must also issue new shares and a new proprietary lease to your lender or their designee if they foreclose. This ensures the lender can recover their investment by selling the unit to someone else.
Additionally, your lender gets the right to cure any defaults you might have on maintenance fees or assessments. If you fall behind on monthly maintenance payments, your lender can step in and pay these amounts to protect their collateral.
Documents Your Lender Will Review
Your lender needs extensive documentation to verify compliance with these requirements. They'll request the cooperative's articles of incorporation, bylaws, proprietary lease form, and recognition agreement.
They'll also need recent financial statements, board meeting minutes, and any amendments to governing documents. The management company must provide a questionnaire detailing the cooperative's operations and any pending legal issues.
If the cooperative has an underlying blanket mortgage, your lender will review that loan's terms and payment history. They need to understand how the building's debt affects individual shareholders and their loans.
Common Problems That Derail Approvals
Some cooperatives have bylaws that give the board too much discretionary power over sales approvals. If the criteria for approval are vague or the board has a history of arbitrary rejections, Fannie Mae may not accept loans in that building.
Financial problems with the underlying blanket mortgage create serious issues. If the cooperative is behind on payments or the loan is in default, new individual loans typically cannot be approved until these problems are resolved.
Inadequate insurance coverage or lapses in required policies will also prevent loan approval. The cooperative must maintain appropriate property and liability insurance, and any gaps in coverage must be addressed before closing.
Recognition agreements that don't properly protect lender rights are another common stumbling block. These agreements must be carefully drafted to meet Fannie Mae's specific requirements, and older agreements often need updates.
References
For the official guidelines, see 5705.6: Legal requirements for New Cooperative Projects in the Fannie Mae Selling Guide.
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Original Freddie Mac Guideline Text
This section contains requirements related to:
Amendments to Cooperative Documents
Rights of Cooperative Shareholders and Sellers
Cooperative Corporation’s lien position
Assignment of Shareholder’s Cooperative Interest
Cooperative Corporation responsibilities and lender rights
Except for Freddie Mac-owned “no cash-out” refinance Cooperative Share Loans delivered in accordance with the requirements in
Section 5705.7
for Exempt from Review, when a Seller delivers a Cooperative Share Loan secured by a Cooperative Interest in a New Cooperative Project to Freddie Mac, the Seller represents and warrants all of the following:
(a)
Compliance with law
The Cooperative Corporation is a validly formed Entity authorized to carry out its independent purposes and is compliant with all applicable State and local laws and ordinances.
(b)
Right of first refusal
If the Cooperative Corporation has retained the right to provide a substitute purchaser, the right to have the first option to purchase a Cooperative Unit, or the right to approve a purchaser, those rights will not:
Be exercised in a way that could be interpreted as discrimination; or
Impair the marketability of the Cooperative Units in the Cooperative Project
(c)
Amendments to Cooperative Project Documents
The Shareholders have the right to amend the Cooperative Project Documents.
(d)
Rights of Cooperative Shareholders and Sellers
The Cooperative Corporation is legally bound to notify the Seller of any material adverse changes including, but not limited to, the following:
Threatened or actual condemnation, eminent domain proceeding or acquisition or any actual loss, whether covered by insurance, that affects any portion of the Cooperative Project or Cooperative Unit
The inability of Shareholders to deduct their Pro Rata Share of Mortgage interest from their taxable income per the Internal Revenue Code (i.e., the Cooperative Corporation no longer qualifies as a Cooperative Housing Corporation pursuant to Section 216 of the Internal Revenue Code)
Any 30-day Delinquency by the Cooperative Corporation in payments due under any underlying Blanket Mortgage, whether the payments are for real estate taxes, assessments or charges imposed by a government entity or public utility or made under the terms of any ground lease
Any lapse, cancelation or material modification of any insurance or fidelity insurance coverage maintained by the Cooperative Project
Any 90-day Delinquency by the Shareholder that is related to the payment of his or her Maintenance Fees or other assessments; and
Any proposed action that requires the consent of a specified percentage of eligible lenders of Cooperative Share Loans
(e)
Cooperative membership requirements
The Cooperative Project Documents must meet all the following requirements:
Require that the sale or transfer of Cooperative Shares, stock or membership certificates in the Cooperative Corporation comply with federal and State security disclosure laws
Require the Shareholders to own Shares, stock or a membership certificate and permit the Cooperative Shares, stock or membership certificates to be pledged and registered in the Cooperative Corporation
Give the Shareholder a right to occupy the Cooperative Unit for a period that extends at least to the maturity date of the Cooperative Share Loan in accordance with the terms and conditions of the Proprietary Lease
Prohibit the Cooperative Corporation from imposing unreasonable limitations on the Shareholder’s ability to sell, transfer or convey his or her Cooperative Share
(f)
Cooperative Corporation’s lien position
The Cooperative Corporation has a good and marketable title to the Cooperative Project land, Cooperative Units and Common Elements, and the Cooperative Project is free and clear of liens and encumbrances except the underlying Blanket Mortgage.
(g)
Assignment of Shareholder’s Cooperative Interest
The Cooperative Project Documents and the Recognition Agreement must not permit the Cooperative Corporation to restrict the sale, conveyance or transfer of a Cooperative Unit owned by a lender, its successors or assigns or place any limits on the assignment of the Proprietary Lease to the lender, its successors or assigns. The Cooperative Project Documents and the Recognition Agreement must also permit the lender, its successors or assigns to:
Transfer the Cooperative Shares and Proprietary Lease if the Shareholder defaults on the Cooperative Share Loan; and
Select a non-corporate designee for any transfer of the Cooperative Shares and Proprietary Lease in the event of a foreclosure if the Cooperative Project Documents require that a Shareholder be a natural person
(h)
Cooperative Corporation responsibilities and lender rights
The Cooperative Project Documents or Recognition Agreement must include provisions to recognize specific rights of the lender that finances a Cooperative Share Loan and the Cooperative Corporation’s responsibilities to that lender, its successors or assigns. The Cooperative Project Documents must provide for at least the following corporation responsibilities and lender rights:
(i)
Corporation responsibilities
The Cooperative Project Documents, Recognition Agreement or other legal documents include, but are not limited to, the following responsibilities of the Cooperative Corporation:
In the event of Shareholder’s default on the Cooperative Share Loan and at the request of the lender of the Cooperative Share Loan, the Cooperative Corporation must:
Evict the Shareholder; and
Terminate the Shareholder’s Proprietary Lease at the lender’s expense
In the event of the Shareholder’s default on the Cooperative Share Loan, the Cooperative Corporation must also issue Cooperative Share(s) and the Proprietary Lease in the name of the lender or its designee
(ii)
Lender rights
The Cooperative Project Documents or Recognition Agreement must grant the lender of a Cooperative Share Loan the right to:
Cure the Shareholder’s default in payment of Maintenance Fees or other assessments
Review and approve the following actions:
Any surrender, cancelation, modification, assignment or pledge of any documents evidencing ownership, possession and use of the Shareholder’s Cooperative Unit
Any further or additional pledge or Mortgage of any documents evidencing ownership, possession and use of the Cooperative Unit
Any action to change the size, existence or form of ownership of the Cooperative Project
