Purchasers of condominiums in Maryland may not realize it, but they could be victims of condominium mortgage fraud due to false information provided to Fannie Mae by the condominium property manager.  Condominium property managers, condominium sellers and real estate agents selling condominiums all have a financial incentive to sell condominiums at the highest possible price. 

When Condominium property managers, condominium sellers and real estate agents parties make false representations regarding the condition of the condominium, including as to structural defects, construction budgets and special assessments, condominium buyers are deceived, often resulting in harsh and unexpected economic loss.

From false representations, to undisclosed surprise special assessments shortly after closing, to mortgage fraud by the property management company in connection with obtaining a loan for a condominium purchase, we fight to protect our clients’ interests and assert their legal rights to recover compensation when they are deceived and taken advantage of.

Whitney, LLP’s real estate and condominium mortgage fraud lawyers have experience representing Maryland condominium owners in claims against sellers, real estate agents, condominium boards and property management companies.

Maryland Condominium Mortgage Fraud

The Fannie Mae Ineligible List

Because the vast majority of mortgage lenders sell their loans to Fannie Mae, mortgage lenders do not make loans to prospective buyers of condominium units within a project placed on the Ineligible List. The lack of financing results in plummeting property values due to sellers being limited to cash buyers, and on account of the stigma of being placed on the Ineligible List, and the underlying reasons for the ineligible status.  Additions to the List are increasing.

As the result, dishonest parties involved in obtaining the mortgage may commit condominium mortgage fraud in order to push the sale through for their personal benefit. 

The Fannie May Ineligible List has been a topic on Reddit, “Secret Fannie Mae ineligible list is a nightmare for condo buyers and sellers” regarding concerns about liability per the List.

Form 1076 Condominium Project Questionnaire

Since January 1, 2022, Fannie Mae has required mortgage lenders to complete a Condominium Project Questionnaire called a Form 1076.  See the actual Form 1076. See the actual Form 1076A Addendum here regarding Building Safety, Soundness, Structural Integrity, and Habitability.  Fannie Mae imposed this underwriting requirement in response to the June 24, 2021, Surfside, FL condominium collapse which killed 98 persons.

Form 1076 is a detailed questionnaire designed to obtain information necessary to evaluate the structural integrity of the buildings within the condominium project. If structural repairs are needed, the condominium project is placed on the Ineligible List until repairs are made and verified.  An accurate Form 1076 can help prevent condominium mortgage fraud. 

The Need For Structural Repairs Must Be Disclosed

Form 1076 was carefully drafted to elicit information relevant to the need for structural repairs. The questionnaire must be answered by either the condominium association, or the task can be delegated to the condominium property manager. Often the project manager supplies the information.

In completing Form 1076, the property manager must identify the most recent evaluation by a licensed engineer. If structural deficiencies were identified, the property manager must identify the needed repairs and the estimated time it will take to complete the repairs. Relevant reports and Board minutes should be attached to the completed Form 1076 Questionnaire.

Funding Through Special Assessment

Form 1076 not only requires information about the needed repairs, it also inquires about the condominium association’s ability to fund the repairs. The property manager must provide financial information including reserves, and whether any special assessment has been approved or whether a special assessment is planned.

Property managers are well positioned to have actual knowledge to provide complete and accurate information to answer the Form 1076 Questionnaire. For instance, they attend all Board meetings, receive engineer’s reports, coordinate bids and scheduling with construction contractors and complete Condominium Resale Certificates to provide to prospective buyers at least 15 days before closing.

Reaction to Form 1076 Requirements

Condominium Boards, property managers and realtors whose practice concentrates on sales of condominiums, and related trade associations panicked when they were informed of Fannie Mae’s new Form 1076 underwriting requirements. Rather than focus on the goal of structurally sound condominiums, these interest groups feared the impact on the market value of condominiums placed on the Ineligible List. Attempts to persuade Fannie Mae to retract or delay implementation of Form 1076 were defeated.

Fraudulent 1076 Responses

Unfortunately, some condominium associations and property managers, determined to artificially prop-up market values, decided to provide false answers and omit the material facts that Form 1076 is designed to elicit. For instance, in order to mislead the mortgage lenders, borrowers and Fannie Mae, the property manager may answer “Unknown” in response to the question about the most recent engineering evaluation, notwithstanding having actual knowledge of an engineering report identifying life safety structural deficiencies due to water infiltration, and construction deficiencies including building code violations, defective design, defective construction and defective repairs.

To keep Fannie Mae and other interested parties in the dark, the property manager will further disregard the request to supply Board minutes and reports bearing on the long-term repair project.  Providing false information on Form 1076 can constitute condominium mortgage fraud.

Concealment of Planned Special Assessment

The property manager may further falsely deny the existence of a special assessment or planned special assessment to fund the multi-millions of dollars needed for the repairs.

A lender who receives the Form 1076 Questionnaire containing deliberately false, evasive responses and omission of important facts, will certify the loan to Fannie Mae as eligible for purchase. Then the typical scenario is for the sale to go to closing. The mortgage lender quickly sells the loan to Fannie Mae; and Fannie Mae sells the loan to another mortgage lender.

All is well until, shortly after closing, the new owner receives news of a large special assessment to pay for the $10 million in repairs that the Board and property manager long knew were necessary but intentionally failed to disclose. 

Legal Remedy For Maryland Condominium Mortgage Fraud

Fortunately, there is a legal remedy arising out of false and incomplete Form 1076 Questionnaires. In Maryland, MD Code, Real Property, § 7-401, et seq., the Mortgage Fraud Protection Act, a mortgage fraud protection statute, provides a private right of action for damages caused by intentional false information or omissions in connection with the mortgage lending process. Significantly, the statute provides for treble damages and an award of attorney’s fees.

For a purchaser of a condominium unit whose mortgage was secured by false answers designed to keep the condominium project off the Ineligible List, and who has sustained economic loss in the form of a special assessment and decrease in market value, such damages can be recovered under the Mortgage Fraud Protection Act.

Consequences of Form 1076 Questionnaire Fraud

Because the purchaser is not provided with the Form 1076 Questionnaire before closing (the form goes only to the lender), the purchaser may be unaware of the property manager’s fraudulent scheme. In some instances, there may be dozens of sales over a two-year period before Fannie Mae finally gets wind of the structural deficiencies and urgently needed repairs. The condominium project then is belatedly placed on the Ineligible List. The purchaser is thus stuck not only with a special assessment, but also with the inability to obtain a home equity line of credit and suffers a significant loss in property value.

If the Form 1076 Questionnaire had been honestly and accurately completed at the time of the first sale following the January 1, 2022 effective date of Form 1076, the condominium project would have been placed on the Ineligible List, the loan would not have been approved, and the sale would never had gone to closing. If the Form 1076 Questionnaire is not accurately and honestly completed, condominium mortgage fraud may have occurred. 

No Duty to Indemnify Property Manager

Some condominium owners may be reluctant to file suit based on an unfounded fear that the condominium association would be held responsible for indemnifying the property manager or for paying the property manager’s legal fees if sued for mortgage fraud. However, the typical property management contract does not provide that the property management company is entitled to coverage or indemnity for fraud.

Purchasers Should Request the 1076 Form

If in doubt, purchasers of condominium units after January 1, 2022, should request a copy of Form 1076 from both the lender and the property manager. A determination can then be made as to whether false information was supplied or important facts were omitted.

In summary, persons who purchased a condominium unit after January 1, 2022 and thereafter, who have been hit with an undisclosed special assessment arising out of the need to repair structural deficiencies, a significant legal remedy may be available to recoup economic losses arising out of a fraudulent Form 1076.

Whitney, LLP has experience obtaining the Form 1076 and evaluating the representations made on the form against the actual history of the condominium project, which often is far worse than represented on the Form.  When fraud and misrepresentations are uncovered on the Form 1076, condominium purchasers can fight back.

Daniel W. Whitney, Jr. and Daniel W. Whitney, Sr. of Whitney, LLP

Maryland Condominium Mortgage Fraud Lawyers – Whitney, LLP

If you are in need a condominium mortgage fraud lawyer, contact Whitney, LLP.  Our attorneys have experience representing Maryland condominium buyers who were deceived in connection with their purchase.

If false representations were made in connection with a condominium mortgage being obtained, it is likely that condominium mortgage fraud has occurred. 

Victims of condominium mortgage fraud have significant legal rights against the parties who provided false information in connection with obtaining the condominium mortgage, including potentially recovering treble damages and an award of attorney’s fees.

Whitney, LLP’s condominium lawyers represent clients across Maryland, including Ocean City, Annapolis, Baltimore, Silver Spring, Columbia, Frederick, Gaithersburg, Germantown, Rockville, Laurel and Ellicott City.

Call Whitney, LLP at 410 583 8000, or use our Quick Contact Form, to discuss your potential case.