On December 28, 2011, Fannie Mae issued new insurance requirements on the condos securing the mortgages it will purchase. Here we give you a feel for the rules and discuss whether it’s smart for your HOA to speak to an insurance broker to determine if your master insurance policy meets Fannie Mae’s requirements.
Why Should You Care About Fannie Mae Rules?
Most people don’t know what Fannie Mae is. But as an association board member, you should at least know the basics.
Of course you know that financial institutions lend money to consumers to purchase property, including condominiums. But fewer lenders would make condo loans if it weren’t for the backing of Fannie Mae, whose mission is to “keep money flowing to mortgage lenders, to help strengthen the U.S. housing and mortgage markets, and to support affordable homeownership,” according to its website.
Fannie Mae doesn’t lend money itself. Instead, it purchases the home loans that banks, thrifts, credit unions, and other financial institutions make to consumers. That allows those lenders to replenish their funds so they can lend to others.
However, to limit its exposure to risky loans, Fannie Mae purchases only those that meet its requirements. That’s where the new insurance rules come in.
The New Rules: An Overview
Under the new rules, for lenders to be eligible to have their condo loans purchased by Fannie Mae, they must request and evaluate the condo association’s insurance documents. If a condo association is covered by a master or blanket insurance policy that combines coverage for multiple condos and other residential or substantially residential projects that are unaffiliated, the coverage limits must meet the higher of the following:
1. They must be greater than or equal to 50 percent of the total insurable replacement value for all condominiums and other residential or substantially residential projects insured under the policy, or
2. They must be greater than or equal to 150 percent of the total insurable replacement value for the single largest condominium or other residential or substantially residential project insured under the policy but not more than 100 percent of the total insurable replacement value for all condominiums and other residential or substantially residential projects insured under the policy.
You think that sounds like mumbo jumbo? Then you also won’t appreciate the 10 or so more rules the insurance policies must meet. And that’s not the end of it. Fannie Mae has also changed its requirements for HO–6 insurance policies, also called “walls–in” policies, which owners get to cover from the “walls in” of a condo unit. Those requirements are also exceptionally technical and described in the December guidelines.
What’s Does It Really Mean?
Fannie Mae’s guidelines are total inside baseball for lenders. But they can and might affect sales in your condo association. If your condo’s master or blanket insurance policies don’t meet Fannie Mae’s guidelines, it’ll be harder for home owners in your community to sell their units because it’ll be harder for potential buyers to get financing for a unit in your association. Many lenders require all their loans to meet Fannie Mae guidelines so the loans can be sold to Fannie Mae, though they may not be.
What’s a diligent board to do? There’s no need to immerse yourself in the Fannie Mae rules yourself, unless you enjoy that sort of thing. But you should consult with your insurance broker to ask if your insurance policies continue to meet Fannie Mae requirements. If not, you’ll need to ask what it’ll cost for the policies to be amended and then determine if it’s worth paying that amount to keep the potential pool of resale buyers for units in your association as broad and deep as possible.