Written By: Stacey Sprain, Op-Ed Writer
Mortgagee Letter 2011-22 dated 6/30/2011 clarifies, expands, consolidates, and updates existing condominium approval guidance while also replacing Mortgagee Letters 2009-46b, 2009-46a and 2011-03. Included with the new Mortgagee Letter are an attached Condominium Approval Implementation Schedule and 95 page Condominium Project Approval & Processing Guide. The revisions listed in this newest Mortgagee Letter are effective starting 08/31/2011. Because of the length of content included within the Mortgagee Letter and attachments, this article is presented in multiple parts. This is Part 4 of an ongoing weekly analysis of the content of FHA’s recent condominium updates.
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Project Insurance Requirements
The condominium project must be covered by hazard, flood, liability and other insurance required by state or local condominium laws or acceptable to FHA. The mortgagee is required to thoroughly review the policy and all endorsements to ensure that the policy covers the following requirements. For proposed or under construction projects, the below insurance requirements are not applicable until the first unit within the project is sold.
Hazard Insurance
In order for HUD or a DELRAP lender to issue final project approval, the project documents must provide evidence that the homeowners association maintains adequate “master or blanket” property insurance in an amount equal to 100% of current replacement cost of the condominium exclusive of land, foundation, excavation and other items normally excluded from coverage.
If the HOA does not maintain 100% coverage, the unit owner may not obtain “gap” coverage to meet this requirement. Any hazard insurance not meeting the stated requirements renders the project ineligible for FHA-insuring.
Liability Insurance
In order for HUD or a DELRAP lender to issue final project approval, the project documents must provide evidence that the homeowners association maintains adequate liability insurance coverage for the project. The homeowners’ association is required to:
• Maintain comprehensive general liability insurance covering all of the common elements, commercial space owned and leased by the owners’ association, and public ways of the condominium.
Fidelity Bond/Fidelity Insurance
In order for HUD or a DELRAP lender to issue final project approval for a project with more than 20 units, the project documents must provide evidence that
• The homeowners association must maintain this insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association;
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• The coverage must be no less than a sum equal to three months aggregate assessments on all units plus reserve funds unless State law mandates a maximum dollar amount of required coverage.
If the homeowners association engages the services of a management company, the homeowners association must require the management company to maintain this insurance coverage for its officers, employees and agents handling or responsible for funds of, or administered on behalf of, the owners association. The required coverage must meet the following requirements:
• Must name the owners association as an oblige;
• Must be in an amount not less than the estimated maximum of funds, including reserve funds, in the custody of the owners association or management agent at any given time during the term of each bond;
• In no event may the aggregate amount of such bonds be less than a sum equal to 3 months aggregate assessments on all units plus reserve funds unless State law requires a maximum amount of required coverage.
Flood Insurance
If any portion of the project’s buildings, related structures or common elements are essential to the property value and are located in a special flood hazard area, the project documents must provide evidence that the homeowners association maintains flood insurance coverage in order for HUD or a DELRAP lender to issue final project approval. The homeowners’ association is required to obtain and maintain:
• Coverage equal to the replacement cost of the project less land costs or up to the National Flood Insurance Program (NFIP) standard of $250,000 per unit, whichever is less;
• The maximum limit of building insurance coverage of a residential condominium building in a regular program community is $250,000 times the number of units in the building (not to exceed the building’s replacement cost);
• The flood insurance coverage must protect the interest of borrowers who hold title to an individual unit as well as the common areas of the condominium project.
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Mortgagee Letters 2009-37 and 2010-43 explain further detail about flood insurance requirements.
HO-6 Insurance Coverage
If the project’s hazard insurance policy does not cover the property from the walls in, prior to closing, the property buyer (in the case of purchase) or owner (in the case of refinance) must provide evidence that he/she has obtained a walls-in” coverage policy (HO-6), including replacement of interior improvements and betterment coverage to insure improvements that the borrower may have made to the unit.
Note: FHA has not established a minimum or maximum amount of coverage required. The borrower is responsible for discussing their insurance needs with their insurance company, and obtaining sufficient coverage based upon the borrower’s improvements.
The “walls-in” insurance must be included in qualifying ratios and must be included in tax and insurance escrows.
About The Author
Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution.
