New Fannie Mae Guidelines

Fannie Mae recently set in place revisions to lending guidelines that will impact people who desire to purchase or sell a condominium or town home. While there will be anticipated changes to income verification, appraisal process, etc., the revisions I will discuss focus on the association master insurance policy. Lenders will be required to scrutinize association master insurance policies; purchase/sales transactions can be delayed if the master policy does not comply with these revised requirements. Association board members and property managers would be prudent to review master insurance policies in light of these new guidelines.

Fidelity Bond. This insurance coverage can either be part of the master policy or a separate coverage; it covers association monies in situations where they are used in an unauthorized manner and no recovery is possible. Associations with 20 or more units are required to have fidelity bond coverage. There are two ways to calculate the required fidelity bond amount for a homeowner association: 1) highest bank balances available in all accounts including working and reserve funds; or, 2) minimum of three-months of dues from all units; only allowed if the CC&Rs contain specific language to limit account access. Most associations are subject to the fidelity bond coverage amount described in #1 above. If your highest bank balance is $150,000 and your fidelity bond coverage amount is $125,000 your association will not comply and may be required by a lender to increase the coverage amount. It is easy to be in non-compliance here as the bond coverage amount may not have been checked in a few years.

The poor economy has had a negative impact on many homeowner associations with unit owners who cannot pay their monthly dues and those subject to foreclosure. Associations can be of great help to those who want to sell or buy by eliminating any gaps in coverage in master insurance policies these new guidelines may create; and thus, not creating a bottleneck in the buy/sell transaction process.

I will discuss two other changes to Fannie Mae guidelines as they related to association master insurance policies in future postings... Stay tuned!

Water, Water Everywhere

HOA boards/property managers can serve their association members well by continuing to look into the future to spot issues before they become problems. A pro-active action can save your association thousands of dollars, possibly prevent legal actions, drain on reserve accounts and the need for special assessments.

One item that is currently on my radar is sewer/drain back-up coverage. By this I mean the potential of a water back-up due to local government not keeping storm drains properly cleared. Let's face it, all local municipalities are dealing with stretched budgets and maintenance such as storm drain clearing may be delayed or ceased all together. If you association complex just happens to be located where a local municipality had to postpone storm drain maintenance think about the potential for a water back-up during a very heavy rainstorm.

In your association master insurance policy there is a coverage for sewer/drain back-up which would coverage damage/clean-up related to such an event. For most the default coverage limit is very low, something like $5,000; an amount that would be hardly enough to make a dent in the sizable bill you will get when a restoration company works for a week to clean up the mess. Consider raising this coverage to at least $100,000; more if you have a larger complex with significant first floor exposure to flooding. This coverage is quite inexpensive so there's really no financial reason not to have the higher coverage amount. Make the review of this coverage one of your pro-active loss control strategies.