The idea for the Federal Housing Administration’s new rules and enforcement was to allow for more buyers to qualify for FHA loans, thus increasing business for condo and apartment associations. But how good is it?

In fact, realtor associations and builders groups are opposed to the new rules, stating that the FHA has just made it that much harder for new building projects to be delivered and for existing apartment and condo complexes to qualify for the federal lending program. Apartment and condo associations agree. One section of the new FHA rules limits how many buyers of condo and apartment units can get an FHA loan. And the rules limit the number of FHA-backed loans to half of the existing units in a building.

 Among some of the new requirements is the stipulation that loans will be approved only for units in buildings where the association boards have deposited a minimum of 10 percent of its annual budget in a maintenance and repair reserve account. If your association property has a small number of units, the requirement puts FHA loans out of reach for your unit buyers.

Worse is if your association is over a month late in assessments, your buildings are excluded from FHA qualification. Likewise, if more than 10 percent of all units are owned by more than one investor, the property will not qualify.

The new FHA rules and enforcement are designed to safeguard the financial health of the organization, which is holding either delinquent or foreclosed status on 18 percent of its insured loans. Its own financial reserves are now below federal minimum standards.

If your association’s property is already above the federal loan threshold, there’s not much you can do to bring your property within compliance. Talk with an experienced association insurance broker to understand how these new rules will affect your association and what steps you can take to protect against the financial impact of the new federal loan limits.

Has your association been affected by the new FHA rules? If so, how?

flickr photo credit: HUD Public Affairs

For additional information:

HUD: Condo/PUD/Subdivision Lookup

HUD: Mortgagee Letter 2009-46B: Condo Approval Process for Single Family Housing

HUD: Mortgagee Letter 2009-46A: Temporary Guidance for Condominium Policy

HUD: Mortgagee Letter 2009-46 A & 2009-46B Frequently Asked Questions

In recent years, with the rising cost of insurance claims and the ambiguous language in some association CC&R’s, insurance coverage has changed dramatically.  Many condominium documents specifically detail what is to be covered – - for example:  roof repair and replacement only.  In this instance, the documents are explicitly pointing out that all other structure is not covered.

A Master Package Policy will generally include property coverage that can be categorized by:

 • Bare walls – coverage for the common elements, usually excludes property within the unit such as interior walls, permanently installed appliances, fixtures, finishings, floors and ceilings  

 • Single entity – coverage for the common elements, usually includes initially installed property in accordance with the association’s original plans and specifications 

 • All in – coverage for the common elements, plus initially installed property, plus improvements and betterments made at the expense of the unit owner

An Association should survey and identify owned property which is to be covered by the association master insurance package:

•  Buildings – residences, clubhouses, garages, carports; Building definition could include foundations, pipes, wires, conduits, utilities, heating, cooling, security systems, machinery and equipment, balconies, porches, decks, and patios 

 • Structures – arbors, awnings, cabanas, sport courts, fences, fountains, gatehouses, gazebos, recreation fixtures. 

 • Other property – could include antennas, indoor/outdoor furnishings, signs, landscaping, fine art.  

 • Non-covered property – could include bridges, roadways, walks, underground infrastructure. 
 

Common causes for the loss of covered property are categorized accordingly:

 • Special form – this is known as an “all risk” form and usually provides coverage for all perils, except those specifically excluded, such as flood, earthquake, war/military action, nuclear reaction  

 • Broad form – this includes loss as a result of fire, lightning, wind, smoke, hail, vandalism, sprinkler leakage, accidental discharge of water, collapse of building 

  • Basic form – most limited coverage of the three types of coverage
 

 In the event of a loss of covered property, the payment of the policyholder will be valued based on: 

• Guaranteed Replacement Cost – replacement cost with no limit and does not state a specific property limit

 • Replacement Cost – payment for the loss is based on the actual replacement and may be limited to stated value

 • Actual Cash Value – loss payments are based on the cost of new product, less depreciation and usage   
 

A deductible will apply to the property insured in the association’s policy.  The deductible could be on an occurrence basis, or could apply separately to each building or unit.  There may be different deductibles for the different covered property. 

One aspect of the deductible to consider is how the deductible will be handled with the unit owner.  Unless the association documents specify who is responsible, the association or the unit owner, then the association should adopt a policy which describes the circumstances under which a unit owner would be responsible for paying the deductible.

It is important that the association Board and its management company understand the scope of the association coverages.  Homeowners should be advised on what is covered.  Even where the association covers improvements, alterations, fixtures and appliances within units, it is advisable for the homeowner to continue to carry coverage on their own separate policy.

For a Master Policy item list that every HOA should review each year, click here

Reprinted with permission © Association Times