The lending guidelines used by Fannie Mae and Freddie Mac can have a tremendous impact on community associations, especially condominiums. This is because the majority of lenders will only issue mortgages for the purchase of a condominium unit if those guidelines are met. In fact, approximately 70% of all condominium mortgages in the United States are backed by Fannie Mae or Freddie Mac.  If a condominium cannot meet the requirements of the guidelines this could have a significant impact on the value of units and the ability of owners to sell them.  Because of this, it is important that board members keep Fannie Mae and Freddie Mac requirements in mind when they make decisions regarding their community.

     The guidelines were recently updated, and some of the changes could have a significant impact on community associations. One of the updates is a change to the insurance coverage that a condominium is required to have in order for their units to qualify for financing. Historically, to meet Fannie Mae and Freddie Mac guidelines a condominium association has been required to maintain insurance coverage for the full replacement value of all buildings and structures. This has been true even if the governing documents of condominiums do not require this level of coverage. The updated guidelines still require full replacement value coverage for most building components, but they now specifically exclude building roofs from this requirement. Going forward, Fannie Mae and Freddie Mac will only require actual cash value coverage for roofs, meaning that the coverage need only cover the value of the roof at the time it is damaged rather than the full cost of replacing the roof. The reason for this change was the recent large increase in the costs of insuring roofs from wind and hail damage, particularly in condominiums.

     It is too early to tell what the long-term effects of this change will be on community associations. Because insurers have been attempting to limit the number and cost of roof claims, the insurance market may adapt to this change by making full replacement coverage more expensive or difficult to obtain to discourage associations from carrying it. If an association is able to obtain and afford replacement value coverage for their roofs, it is advisable that they keep this coverage so that they will be able to replace the roofs in the event of a loss. If it does become necessary or advisable to reduce coverage, however, boards must also keep in mind that their governing documents may still require that they maintain replacement value coverage for the entirety of the buildings, including the roofs. Additionally, if the governing documents are silent on the level of coverage, Section 5311.16 of the Ohio Revised Code requires that buildings be insured at not less than 90% of the replacement cost, which would very likely exceed the actual cash value. It may, therefore, be necessary to amend the governing documents to authorize a reduction in coverage on roofs below the replacement value before making that change. Community association boards should work closely with their insurance agents and legal counsel to ensure that they have appropriate insurance coverage in light of the updates to the lending guidelines.

     If your association has questions or concerns regarding compliance with the updated Fannie Mae and Freddie Mac lending guidelines, please reach out to Williams & Strohm, LLC at 614-228-0207 and speak with one of our attorneys.