source:
  type: guide
  id: fnma-sel-b4-2.3-03
  authority: Fannie Mae Selling Guide B4-2.3-03 — Legal Requirements for Co-op Projects
  description: Fannie Mae Selling Guide B4-2.3-03 — Legal Requirements for Co-op Projects.
  coverage_tier: operative
obligations:
- id: fnma-sel-b4-2.3-03-full
  canonical_id: fnma-sel-b4-2.3-03-full
  section: Fannie Mae Selling Guide B4-2.3-03 — Legal Requirements for Co-op Projects
  type: do
  tags:
  - regulator-direct
  - fnma
  - selling-guide
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: Fannie Mae Selling Guide B4-2.3-03 — Legal Requirements for Co-op Projects
    source_class: fnma-guide
    source_url: https://singlefamily.fanniemae.com/media/document/pdf/selling-guide
    snapshot_id: 5f7b8b79da595d76
    fetched_at: '2026-05-25T14:09:57Z'
    content_hash: sha256:98cf85a02861bbe84914a0e339b327c8fc131869a8a573882007bbeea60c5701
    paragraph_quote: 'B4-2.3-03, Legal Requirements for Co-op Projects (11/06/2024)
      Introduction This topic contains information on legal requirements for co-op
      projects, including: Amendments to Documents Co-op Membership Lien Position
      for Co-op Share Loans Prior Co-op Financing Assignment of Co-op’s Lease/Occupancy
      Rights Co-op Corporation’s Recognition Agreement, Responsibilities, and Lender’s
      Rights Lender’s Rights Amendments to Documents The co-op project’s documents
      must provide for the tenant-stockholders to have the right to amend them. In
      addition, the co-op corporation must be legally bound to notify the holder of
      a co-op share loan about any proposed material changes to the co-op project
      with respect to allocation of membership interests, voting rights, insurance
      coverages, and any other provisions that are for the express beneﬁt of the lender.
      Co-op Membership The project documents must require that the sale or transfer
      of stock, shares, or membership certiﬁcates in the co-op corporation be in compliance
      with federal and state security disclosure laws. The documents also must require
      tenant-stockholders to own stock, shares, or a membership certiﬁcate, and permit
      the stock, shares, or membership certiﬁcates in the co-op corporation to be
      pledged and registered. The project documents must give the tenant-stockholder
      a right to occupy the unit for a period that extends at least to the maturity
      date of the share loan, although this right should be subject to the terms and
      conditions of Published May 6, 2026 693 a proprietary lease or occupancy agreement
      between the tenant-stockholder and the co-op corporation. The documents also
      must prohibit the co-op corporation from imposing unreasonable limitations on
      the tenant- stockholder’s ability to sell, transfer, or convey their membership,
      or to sublease their unit. If the purchaser’s right to membership or occupancy
      is subject to any right of the co-op corporation to give approval, the lender
      must furnish evidence to clearly show that such approval has been given before
      Fannie Mae will purchase or securitize the co-op share loan. Lien Position for
      Co-op Share Loans The share loan must be secured by the assignment (in pledge
      or trust) of the borrower’s leasehold estate; a pledge or trust of the corporation
      stock, shares, or membership certiﬁcate; and any other documents that are appropriate
      under individual state or local laws and practices. The lender that is ﬁnancing
      the share loan must receive an assignment of the proprietary lease, occupancy
      agreement, or other similar evidence of the right to occupy the unit for all
      share loans that it delivers to Fannie Mae. The lender must also obtain a stock
      power, assignment, or other similar document that authorizes the lender to transfer
      ownership interest in the event of a default. Valid ﬁnancing statements and
      assignments of ﬁnancing statements must be executed and ﬁled, if necessary to
      perfect Fannie Mae’s security interest under the Uniform Commercial Code of
      the state in which the property is located. Information searches or equivalent
      evidence of ﬁling ﬁnancing statements and assignments of ﬁnancing statements
      must be obtained and must show that the Fannie Mae co-op share loan is in ﬁrst-lien
      position. In those states in which co-op units are considered real property,
      perfection of the lien must comply with state law applicable to real estate.
      The share loan must be a ﬁrst-lien, except that, where custom dictates to the
      contrary, Fannie Mae will permit its lien to be subordinate to the co-op corporation’s
      lien against the tenant-stockholder’s shares for unpaid assessments that represents
      the pro rata share of the corporation’s payments for the blanket mortgage, current
      year’s real estate taxes, operating expenses or maintenance fees, and special
      assessments. Note: The pro rata share of the project debt that is related to
      the co-op share loan cannot exceed 35% of the sum of the related pro rata share
      of the project debt and the appraised equity interest value of the shares. Lenders
      may use a higher ratio (not to exceed 40%) when there are fully documented compensating
      factors that justify using the higher ratio. Fannie Mae will also permit its
      lien to be subordinate to any assignment of rents or maintenance expenses in
      any mortgage or deed of trust that is secured by the co-op project, or any Regulatory
      Agreement entered into by the co-op corporation and the Secretary of HUD as
      a condition for obtaining HUD mortgage insurance. Prior Co-op Financing The
      co-op project must be in compliance with the requirements imposed by the holder
      of any prior ﬁnancing for the project. If the blanket mortgage on a project
      includes a due-on-encumbrance clause and the project is located in a state in
      which share loans are considered to be an encumbrance on the project, the blanket
      lender must consent to the share loan ﬁnancing. In the case of a conversion
      of an existing building, the blanket lender must agree to the use of the building
      as a co-op and, if it is feasible, agree—in the event of a default on the blanket
      mortgage—not to wipe out the shares of those tenant-stockholders who are current
      in the payment of their assessments or carrying charges. Published May 6, 2026
      694 Assignment of Co-op’s Lease/Occupancy Rights Generally, the project documents
      should not permit the co-op corporation to restrict the sale, conveyance, or
      transfer of a unit owned by a lender, its successors, or assigns, nor to place
      any limits on the assignment of the proprietary lease or occupancy agreement
      to the lender, its successors, or assigns. This lease or agreement must be assumable
      by the lender if the tenant-stockholder defaults on the share loan. If the co-op’s
      organizational documents require that a tenant-stockholder be a natural person,
      they must permit the lender to select a non-corporate designee for any assignment
      of a proprietary lease or occupancy agreement that it acquires through foreclosure
      or acceptance of a deed in lieu of foreclosure. If the lender assumes the lease
      or agreement as the result of the tenant-stockholder’s default, the co-op corporation
      must allow the lender to attempt to sell its interest in the lease or agreement.
      However, if the lender is unable to eﬀect a satisfactory sale within 60 days—either
      through its own eﬀorts or with assistance from the co-op corporation—the co-op
      corporation may not prohibit the lender from subletting the unit. The project
      documents may grant the co-op corporation the right to approve a lender’s sublessee
      or to oﬀer an alternate sublessee that is satisfactory to the lender. However,
      the co-op corporation’s approval standards and procedures may not be unreasonably
      restrictive or in violation of applicable law, and the action must be completed
      within a reasonable time after the lender requests approval of a proposed sublessee.
      Co-op Corporation’s Recognition Agreement, Responsibilities, and Lender’s Rights
      The project documents must either require the co-op corporation to execute a
      separate agreement—such as a recognition agreement—or include provisions to
      recognize speciﬁc rights of the lender that ﬁnances the share loan (or those
      of its successors or assigns) and the co-op corporation’s responsibilities to
      that lender. Co-op Corporation’s Responsibilities The recognition agreement
      or other legal agreement (or the project’s legal documents) must include, among
      other things, the following responsibilities for the co-op corporation: The
      co-op corporation must evict a tenant-stockholder who has defaulted on their
      share loan and must terminate that tenant-stockholder’s lease, if the share
      loan holder requests it to do so. The co-op corporation must be legally bound
      to notify the lender of any of the following changes or occurrences: any threatened
      or actual condemnation, eminent domain proceeding or acquisition, or any actual
      loss, whether or not covered by insurance, that aﬀects any portion of the co-op
      project or unit; failure to maintain compliance with co-operative corporation
      eligibility under IRS Code Section 216; any 30-day delinquency by the co-op
      corporation in payments due under any blanket mortgage for real estate taxes,
      assessments, and charges imposed by a government entity or public utility, or
      under any ground lease; any lapse or cancellation of any insurance coverages
      maintained by the co-op project; any proposed action that requires the consent
      of a speciﬁed percentage of eligible share loan holders; and Published May 6,
      2026 695 any 90-day delinquency by the tenant-stockholder that is related to
      the payment of their monthly assessments or carrying charges. If the co-op project
      is subject to a ground lease, in the event of a condemnation or similar taking
      proceeding aﬀecting any portion of the co-op project or the unit, the co-op
      corporation must protect the lender''s ﬁnancial interest. Lender’s Rights The
      project documents must grant the lender ﬁnancing a share loan the right to cure
      the tenant-stockholder’s defaults in their assessment payments or carrying charges
      and the right to review and approve the following actions before the co-op corporation
      can consent to them: any surrender, cancellation, modiﬁcation, or assignment
      of any documents evidencing ownership, possession, and use of a unit; any sublease
      of a unit; any further or additional pledge or mortgage of any documents evidencing
      ownership, possession, and use of a unit; any action to change the form of ownership
      of the project; or the contraction, expansion, or termination of the co-op project.
      Recent Related Announcements The table below provides references to recently
      issued Announcement that are related to this topic. Announcements Issue Date
      Announcement SEL-2024-07 November 06, 2024'
  judgment: false
