The relationship between community association insurance and lender requirements is often a balancing act. When one makes a change, the other must adjust accordingly. In the past couple of years, many associations have been affected by changes enacted by the Federal National Mortgage Association (FNMA or Fannie Mae). FNMA and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) guarantee a large number of mortgages in the United States. This means that most loans involving a condominium sale will be affected by FNMA requirements. If an association’s insurance policy does not comply with the requirements, it can have a significant impact on unit sales.
For years, the FNMA requirements stated that a community association’s insurance policy deductible could not exceed 5% of the property insurance coverage amount. In December 2022, FNMA made a clarification that states this 5% maximum applies to all deductibles for all required perils, including any separate per unit deductibles. Per unit water damage deductibles have become common across the industry for community association insurance policies. Because of this, many associations whose policies included a per unit water damage deductible were forced to adjust their policies to comply with FNMA’s guidelines, or in some cases move their policies to new carriers.
In recent months, we have experienced a significant increase in the number of lenders getting pushback from FNMA compliance officers on certain association insurance requirements. Examples include:
- Inflation Guard – This coverage automatically increases the property coverage amount each year to adjust for inflation. This is not required if it is not obtainable in the markets available to the association.
- Waiver of Rights of Recovery or Waiver of Subrogation – FNMA requires this waiver to be included under an association’s property insurance. This coverage states that the insurer waives their rights to recover payment from any unit owner in the event of a loss.
The prevalence of these issues is new, and agents are learning what can and cannot be done to meet these insurance requirements to satisfy FNMA. Preferred insurance carriers can often accommodate these requirements or write policies that are already compliant. However, if your association is in the high-risk market, it may not be possible to find carriers who will offer some or all of the needed coverages. If this is the case, it is up to the lender involved to request a waiver or find other loan options for the buyer.
The timing of home loans during a sale is important. Often a sense of urgency exists with lenders and buyers trying to ensure that an association’s insurance policy complies with FNMA lending guidelines.
The ABI team continues to work diligently to address these issues with lenders and boards as they arise. We are hopeful that more carriers will be able to make adjustments and offer solutions to these issues.
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