Fannie Mae Guidelines-Part 3

This post concludes a series regarding 2009 changes to Fannie Mae lending guidelines that impact lender review of association master insurance policies. This third impact area is the most ambiguous as the guidelines published to-date do not specify what Fannie Mae considers acceptable.

Lenders will be looking for building ordinance coverage contained within an association's master insurance policy. With regard to building ordinance coverage there are three parts - A, B and C; lenders will interested in part C. To provide a brief background the concept of property insurance is to rebuild a dwelling the way it was when it was originally built. A problem comes into play when times goes by and the city or county passes new building codes to improve energy efficiency or fire safety; examples would include higher insulation requirements, more fire resistant roofing materials or more energy efficient windows. The dwelling coverage contained within an association master policy is not designated to pay for these changes to building code; building ordinance coverage C is meant to cover these costs. Building ordinance coverage C usually comes standard with a minimum amount of around $5,000 and can be increased to fit circumstances. Usually the older a building is the more building ordinance coverage C is needed; for example a 100-unit complex that is 25-years old may require $1.5 million or more in coverage to comply with building code changes that have been mandated since the original build date. Taking this example,if a complex had a need for $1.5 million in building ordinance coverage C but only had $5,000 in actual coverage you can see there is a major financial gap that would have to be made up with special loss assessments imposed on all unit owners. To circumvent this special loss assessment scenario, lenders will be looking for adequate amounts of building ordinance coverage before approving a loan to someone who wishes to purchase a unit.

One building code requirement that can really ramp-up costs are interior fire sprinkler systems; some cities/counties now require them for all new condo/town home complexes with more than four units. This fire sprinkler systems can add $15,000 or more (per unit) to rebuild costs.

Property managers and HOA board members would be prudent to review association master policies for building ordinance coverage C limits to avoid unnecessary delays in funding of loans for prospective incoming buyers. If you have an inadequate amount of building ordinance coverage C; it will cost more to bring it in-line with where it needs to be. Work with your insurance agent/carrier to determine the correct amount of coverage. Just to give you some scale of the issue; 8 of 10 association master policies we review have INADEQUATE amounts of building ordinance coverage C!

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!