On December 28, 2011, the Federal National Mortgage Association (Fannie Mae) announced new condominium insurance requirements. The changes are effective for mortgage loans with application dates on or after January 1, 2012.

Fannie Mae is the nation’s largest player in the secondary mortgage market. It is related to but operates differently than the FHA. Instead of insuring loans, it buys FHA insured loans from lenders. Accordingly, any change in Fannie Mae policies can significantly impact the housing market in California.

Walls-In Coverage. Fannie Mae is eliminating “walls-in” insurance coverage terminology. In addition, it is changing HO-6 coverage from no less than 20% of the unit’s appraised value to an amount sufficient to repair the condominium to its condition prior to a loss whether the claim is paid by the association’s property insurance, by the homeowners HO-6 policy or some combination of both. Does this mean HOAs need to insure the improvements in a unit? That is unclear. What about owner upgrades (hardwood floors, granite counter-tops, walnut cabinets, etc.)? It seems unlikely that HOA property insurers will want to be responsible for any and all improvements & betterments in a member’s unit. These problems need to be resolved before the market can fully recover.

Selling Guide. In addition, Fannie Mae is updating its Selling Guide to permit master or blanket insurance policies that combine insurance coverage for multiple condominiums or other residential or substantially residential projects that are unaffiliated as long as the coverage meets certain specific criteria. See Fannie Mae Servicing Guide Announcement SVC-2011-23.

RECOMMENDATION: If associations want to maximize the marketability of units in their developments, boards should talk to their insurance brokers about Fannie Mae’s requirements and determine whether any changes need to be made to their current insurance coverage. Because Fannie Mae’s requirements may conflict with CC&R provisions, boards should include legal counsel in their evaluation.

Thank you to Clifford Treese of Association Information Services, Inc. for his assistance with this update.

Adrian J. Adams, Esq.
ADAMS & KESSLER LLP