BERG INSURANCE AGENCY - EDUCATION CORNER

Common Interest Developments

There has been some discussion of revised Fannie Mae guidelines with respect to community associations. This discussion has brought confusion, and I hope to provide some clarity to the issue.

Fannie Mae presented Announcement 08-34 on December 16, 2008 titled “Project Eligibility Review Service and Changes to Condominium and Cooperative Project Policies.” Among the many items included in this Announcement are general policy changes regarding project eligibility requirements, and condominium association project insurance clarifications.

Here are some of the items included in the Announcement. Keep in mind these guidelines only apply to Fannie Mae. Other banks and lending institutions will have their own lending guidelines and provisions:

General Policy Changes Regarding Project Eligibility Requirements (effective 3/1/09)

Hazard Insurance for Units in Attached Condominium Projects, Including 2-4 Unit Projects

There are a number of items included in the Announcement under this heading, but this is perhaps the most home-hitting topic. Previous regulation required lenders to verify condominium project hazard insurance was in place and covering “fixtures, equipment and other personal property inside individual units if they will be financed by the mortgage.” The revision requires a borrower to have in place “walls-in” coverage unless it can be verified that equivalent coverage is included on the master policy for the association. This coverage for improvement and betterment to the interior of a unit must include upgrades made by the borrower (it is not clear if it must also include upgrades made by a previous owner).

The interpretation is this: if it can be verified that the association master policy includes coverage for interior improvements to a condominium (in their current state, not as were installed by the builder), the requirement for Fannie Mae is met. If it cannot be verified, or if there are exclusions to the master policy limiting the amount of coverage for interior fixtures (i.e. floor, wall and ceiling covering exclusion; “bare walls” policy; etc.), the borrower must maintain a Condominium Unit Owners policy (HO-6) that provides coverage for these interior improvements.

Verification could be as simple as a notation on a Certificate/Evidence of Insurance from the master policy agent/broker’s office which indicates the master policy meets Fannie Mae guidelines for insurance of interior fixtures and improvements. If a lender requires additional documentation, it can be provided by the agent/broker.

In addition, the coverage limit for interior improvements on an HO-6 policy must be no less than 20% of the appraised value of the unit. For example, if a unit is appraised at $250,000, the minimum limit of coverage for interior improvements on an HO-6 would be $50,000. This coverage will typically come at a cost of $3-$4 per $1,000, implying an expense of at least $150 to $200 to the unit owner.

Finally, the deductible on the HO-6 policy can be no more than 5% of the coverage amount. In the previous example, the deductible could be $12,500 or lower. This will not typically be a concern, because policies of this type are usually written with deductibles in the range of $1,000 to $5,000 per claim.

There is silver lining to this provision, as it should provide incentive for associations to review their governing documents and insurance policies to ensure the policy is in line with document requirements. In addition, this may create more interest in revising the documents to actually remove interior coverage and put the responsibility of insuring that property on the owner who is maintaining the improvements. The alternative is for the association to have a policy that protects against the loss or damage to property improvements such as upgraded cabinets, floors, granite counters, etc. This would put the association at risk for larger and more frequent claims activity.

Revising the governing document to allow for a ‘bare walls’ policy (one in which the responsibility to insure all interior improvements is placed on the individual unit owner) has a number of benefits for the association and membership. First, there would be need for each owner to purchase an appropriate HO-6 policy. Also, the removal of the coverage from the master policy would protect the future insurability of the association and reduce the overall annual insurance expense. In the end, the responsibility for insuring interior improvements should be placed on the party responsible to maintain that property.

Other Topics

Pre-Sale Requirements for Attached Units in New and Newly Converted Condominium Projects

·         Increases from 51% to 70% the required number of units in a project or phase conveyed or under contract for purchase as a buyer’s primary or secondary residence. 

Delinquent HOA Dues for Units in Attached Condominium Projects

·         Changes delinquent dues requirements from 15% of the condominium/association fee payments more than 1 month delinquent to no more than 15% of the units in the project can be more than 30 days delinquent on payment of fees.

Fidelity Insurance for Units in Attached Condominium Projects

·         New and established (previously only new) associations of over 20 units must have fidelity insurance in place

Condominium Association Project Insurance Clarifications (effective immediately)

This section of Announcement 08-34 is intended to clarify master hazard insurance policy requirements for condominiums. The association must maintain a policy that covers 100 percent of the replacement cost of the project (exclusive of items typically excluded from the policy, such as land, foundations, excavations, etc.). The blanket policy cannot be one that covers “multiple unaffiliated associations or projects.” For example, if a management firm purchases a policy in which a single blanket limit covers the associations within this firm’s book of business, none of the units within any of those associations covered by the blanket limit are eligible for a Fannie Mae backed loan. 

While there are benefits to the purchase of a multiple association blanket policy, most notably in the form of reduced insurance expense, legal counsel should be contacted for review of the governing document. The concern is the documents typically require the placement of insurance in the best interest of the membership, and more often than not, actually require the association to comply with Fannie Mae, Freddie Mac and other government lending institution guidelines. By purchasing the described policy, the association is effectively limiting the lending options to any owner and may be in violation of the governing documents.

Planned Unit Developments

It has been suggested in recent communication from industry insurance professionals that Announcement 08-34 re-defines Planned Unit Developments with ‘attached’ single family homes as condominiums, regardless of language in an association governing documents (CC&R). It is my opinion that the Announcement does no such thing. The term Planned Unit Development (PUD) is used sparingly throughout the document, except in reference to a previous Announcement (07-18) which remains unchanged unless otherwise indicated. 

Announcement 07-18 (p. 10):

If the project's legal documents allow for the individual unit owners to obtain their own hazard insurance policy and allow for a blanket insurance policy to cover the project’s common elements, we will accept two policies to satisfy our insurance requirements. A lender must verify that both the project and individual unit are covered by the required hazard insurance policies before it delivers a mortgage or cooperative share loan secured by a unit in a condominium, cooperative, or PUD project.

In my opinion, at no time does Announcement 08-34 indicate a change or amend the above statement.

Michael Berg MBA, CMCA, CIRMS

Michael Berg is Vice President of Operations for Berg Insurance Agency.