Lenders and the condo market are still in a world of gray. No market can stabilize if the rules keep shifting faster than we can keep up with them. This frustrates both buyers and sellers, as some of these changes come into play while someone is in escrow, and the lender did not foresee the “complication”.
We are seeing this more with condo purchases than with single family homes. One of the reasons I have not done stats on the condo market for many, many months, is that all of the cards are NOT on the table with which to draw conclusions. Lenders are very, very tough on the condo market, and increasingly so.
Before I get into the “more insurance mandatory” piece of this post, I am seeing other complications with condo financing.
1) Conventional sellers wanting higher than usual downpayments and/or PMI companies refusing insurance on the difference between the down payment the lender will allow and 20% down. In the high end condos, some lenders are requiring 30% down payment if it is a condo and the resultant mortgage is a jumbo loan after the 30% down. In the lower priced condos, the lender may allow a 5% or 10% down, but the PMI won’t insure the remaining 10% or 15% to get to an 80% LTV in some cases.
2) SIGNIFICANT changes in HOA dues or special assessments caused by the “NEW RULE” that makes it mandatory for a condo association to have a Reserve Study. The net result of the reserve studies done by condos that had never before done one (some did even when it was not mandatory) is that they are finding they are grossly underfunded as to reserves. This is creating an increase in dues (in some cases double) to catch up on insufficient reserve requirements, or outright special assessments when the study points out deferred maintenance items.
BE VERY CAREFUL when valuing a condo based on “The Comps”!!! If the comps sold when the monthly dues were $185, but the dues are now $365 because a Reserve Study was done that indicated insufficient reserves, the PRICES of “the comps” need to be adjusted to compensate for the increase in dues since those condos sold.
Now to the topic of this post “Lender says: More Insurance Mandatory”. A recent comment on one of the lender posts (Rhonda’s) asked about the ability of lenders to require the buyer of a condo to have a separate policy. This additional requirement, if noted while in escrow, can cause a sale to fail if the additional unanticipated monthly amount increases the buyer’s ratios as to monthly payment outside of the pre-approved status. So VERY important.
A short history on this issue. Traditionally lenders ONLY required a copy of the Association’s Master Insurance Policy in order to close escrow on a condo purchase. The buyer of the condo was not required by the lender to have additional insurance over and above the HOA Master Policy.
Over the years I have seen the Deductible Amounts of the Association Master Policies increase from $1,000, to $5,000 to $10,000 and in some cases as high as $20,000. The Master Policy no longer covers the condo buyer and buyer’s lender as it once did due to these increases in deductible amounts. After 911 and Katrina a lot of insurance companies (due to weakened financial position generally) decided not to insure Condos at all. The number of Companies willing to provide a Master Policy to Condo developments (especially old ones built in the 70s) dwindled in some cases from 100 or more to a small handful.
Insurance premiums for same coverage and deductible skyrocketed, BUT the condo associations did not want to increase the dues that drastically. Consequently in order to reduce the insurance cost and keep dues from increasing drastically, the Boards of the Condo Associations increased the deductible in order to keep the insurance cost in line with prior year premiums.
OK…that’s the history. It has always been advisable for a condo unit buyer to get a separate personal insurance policy to supplement the Master Policy. Each Association’s Master Policy has different coverage and so I have often suggested that the condo buyer use the same insurance provider, if and when possible, and always give the Master Policy of the complex to the insurance agent to determine what supplemental insurance is needed. Covering the difference between the huge deductible on the Master Policy is a need for everyone buying a condo, in addition to covering their interior responsibility and belongings.
Apparently some lenders are now requiring this separate policy in order to fund a condo mortgage. This is hitting some lenders by surprise. Surprise is not good, ever. BUT requiring the condo buyer to have a supplemental policy IS good and this change is not only for the better…but a long, long time overdue.
To answer the question “CAN a lender require this?” Of course the answer is yes the same as they can and do require “adequate” insurance when buying a house. The only change is that “adequate” insurance with regard to condos “used to be” the Master Policy only. Now in some cases it is Master Policy PLUS unit owner Supplemental Policy, and that is as it should be IMO.
Hi Ardell,
Thanks for keeping us up to date on this issue. I’d like to see all listing agents have the insurance piece of the puzzle clear and disclosed before the homebuyer makes an offer. I know the listing agent can’t do much about the lender side but…maybe they can.
Many listing agents work with their favorite mortgage LO to put together sample monthly payments, etc. I’ve seen flyers like this inside listings.
Maybe the listing agent’s favorite LO could have current information on condo lender guidelines avail inside the listing.
Thanks so much for sharing information about this Ardell. Many people don’t realize that these changes are happening, much less how it can affect their ability to buy – or sell a condo.
Jillayne – very good suggestions, but different lenders have different guidelines and they are changing all the time. Not sure many (any?) loan officers or mortgage bankers (who are my choice in this type of lending market) are willing to put out information which may be outdated tomorrow …
re “Not sure many (any?) loan officers or mortgage bankers (who are my choice in this type of lending market) are willing to put out information which may be outdated tomorrow …”
I would say probably not many LO’s, Joe…I think you hit the nail on the head. I don’t think the agent would want outdated bad info in the condo. Guidelines from lenders and pmi companies change that quickly… and worse case, no body wants to be stuck with a condo loan they can’t sell…especially a condo.
It would be helpful to have a resale cert handy to provide to your lender upfront so they can see if there are any potential issues.
Rhonda,
I normally don’t have the owner order a resale certificate “up front” because they get stale as to the amounts in reserve and delinquencies, etc. In a hot market, you could order them up front, but not in this market. They expire, and then the owner has to pay for them twice. They are not free to the owner. The usual cost is about $150 and some HOAs will not issue them until you have the name of the buyer, much like Title Insurance.
Having the Resale Certificate early would not help the buyer or the seller on this issue. Having a copy of the Master Policy Dec Page might be helpful to get insurance quotes in advance. But the seller isn’t getting the quotes, the buyer is. So ordering it early doesn’t work anyway you slice it. The buyer when getting a pre-qual often doesn’t know what they are buying yet. So I see no way to get in front of this issue.
The only way to handle all this is as I have written before, buyers should NOT be qualified to the MAX point, such that a higher rate by the time they find a house or an insurance requirement like this, will render the pre-approval invalid. The assumptions as to real estate taxes and other costs has to be realistic and even on the high side.
In fact the pre-qual should be for a range “$350,000 to $375,000 depending on the particulars of the property you choose”. Then both the buyer and the seller know if they are pushing the limits if the sale price is the upper limit of the range.
Hi Joe! Happy New Year!
To both Jillayne and Joe, that is really not a “listing agent” function. It is the responsibility of the agent for the buyer, not the agent for the seller.
The agent for the buyer should be recommending a separate policy, whether the lender requires it or not. The agent for the seller would not want to increase the cost to purchase by recommending more than is required. It is contrary to the seller’s objective to do that. It has to be handled by the Agent for the Buyer.
If we get to the point where ALL or even MOST lenders require this insurance, then it may appear in the condos. But I am not a big fan of lender info being inside listings since, again, the agent for the seller should not be interfering or steering the buyer’s loan choice or process. It would be like having the name of a home inspector the seller likes inside the house. Not a good idea. Let the buyer choose lender and all services without prompting from the seller.
The buyer’s agent in many if not MOST cases is getting paid more than the Listing Agent. This job falls on their side of the fence.
The lender “requirement” may be different from one buyer to the next. I have noticed that some car dealers are requiring a full 4 year warranty prepaid for some car buyers and not others. The requirement to have extra and optimal insurance may be greater if the home buyer/borrower is borderline qualified with little excess reserves after purchase.
Ardell:
Thanks for taking up the subject. Here was my comment, admittedly WAY off topic, from Rhonda’s FHA post.
“I am helping a client that saw her lender’s escrow account jump by $400/mo. Apparently a hazard insurance policy has been imposed upon her by the lender, without her consent. She is in a condo, and the HOA pays for hazard insurance, so I am assuming it is related to the newer “walls in
Roger,
I am in the process of refinancing. The closing is today. Yesterday, the lender surprised me that I had to increase the “Dwelling coverage” of my condo to 20% of the condo’s appraised value (it was 1% as we don’t have anything valuable- old kitchen, bath etc.). I did increase the insurance, thinking I would modify it later. What I found today was that they put the condo insurance as a Hazard insurance, initially collecting 7 payments and requiring me to pay it as part of my mortgage.
The GFE did not contain any other than the usual interest and taxes.
This refinancing appears to be nonsense and a rip off. I feel this is fraud as the lender hid information and mislead me to go to closing asking me to give money for something that I am not willing to. I am also worried that the bank may decide to increase hazard insurance later without my consent.
Roger,
For a couple of years I managed Condo and Townhome complexes and I can tell you that EVERY lender SHOULD require a supplemental unit owner policy. The reason I recommend they try to use the Master Policy insurance provider (not always possible – used to be) is they fight back and forth over whether it is the master policy to pay or the individual policy to pay. If they are the same company there is no delay on processing claims.
If the HOA policy is $10,000 deductible, and many are these days, then that doesn’t cover most unit type issues that are less than $10,000. Individual polices carry $500 deductible or $1,000 max usually. So it’s not about “walls in” it’s about the deductible. If the claim is $6,000 the master policy doesn’t help them if the deductible is $10,000.
At first I thought you were saying $400 a month! This is $400 a year and $35 a month and well worth it! Instead of fighting it…lenders and loan brokers should put this cost on the GFE and tell the borrower to get it even if the lender does NOT require it.
Can you clarify that $400 is the annual amount and not the increase in monthly payment. An extra $400 of closing costs should not be a “deal breaker”, especially if it is for something the borrower should be encouraged to have. One blown in-unit hot water tank or leaky dishwasher or spilled over washing machine will make the condo owner glad to have that supplemental policy. It is not the Master Policy problem if you stuffed your washing machine too full and went to work to come home to a wet mess that flooded into your unit AND the neighbor’s unit.
It is $400/mo, but that is an escrow catch up.
The actual policy imposed was $900/yr. I don’t know the details of that policy yet.
And in this case, it is for someone that has owned for 4 yrs, with their payment staying the same all that time, and suddenly jumping $400/mo. She has provided proof that there IS both a Master Policy (which I haven’t seen yet) and an individual policy.
Only other time I run into sudden escrow jumps is when someone buys new construction and the escrow gets set up at unimproved (raw land) value. I can see that one coming, and of course tell my client to expect that increase. Lenders have got better at anticipating improved value, so I haven’t seen that lately.
I wonder what the precentage of condo owners with both Master and Individual. I do not run into it that all that much.
There has been a change in lending requirements for “walls in” coverage from Fannie and Freddie. I’m told this is because many units in the FL market were looted for their fixtures, and anything that could be removed of any value, as well as damage from neglect to interior walls and doors, so the lender wants to make sure the insurance covers fixing those deficiencies.
hmmm $900 a year doesn’t add up to $400 “a month” anyway you slice it. Still $900 seems awfully high for a supplemental policy, unless it is a very big and expensive condo.
You lose me on all the “refi” talk 🙂
As to % with both master and unit insurance, several years back some HOA’s were trying to make it mandatory for unit owners to have supplemental unit insurance, without much success. They did have someone come and speak about it at HOA meetings, but…you can lead a horse to water but you can’t make them drink.
New condos might be able to make it a condition, but for older ones…hard to add that “new rule”. The old “master policy only” needed for closings was from the old days when the master policy covered most everything and had a small deductible.
I agree that $900/yr doesn’t add up to $400/mo, yet, these are the actual numbers. Escrow catch ups are not my area of expertise, but I imagine the bank gets to state the terms, and wants to be at an acceptable level of reserves ASAP.
It is not a luxury condo…value is in the $230K range.
I have yet to hear about anyone having similar problems, it would be interesting to see the extent of this.
Roger,
$400 “now” does not mean “$400 a month”. Escrow “catch up” is about the due date of the insurance policy annual payment. Same as Property Taxes. They may want $2,000 in property taxes the day of closing, but that does not make property taxes “$2,000 a month”.
$900 divided by 12 months = $75 a month.
The normal handling of insurance issues for a purchase loan vs refi, is to collect a year (paid to insurance provider at closing) plus 2 months (in lender escrow) at closing (*see RESPA restriction on escrow balances below). The year buys a full year policy paid in advance, and the 2 months provides a cushion so they can pay the next annual policy 60 days in advance of the policy expiration date.
My guess on the $400 now vs. $1,050 now (which it would be on a purchase loan for main insurance policy) is it is a monthly paid vs annually paid policy. So be happy for $400 as usually it would be $1,050 on a $900 a year policy 🙂
I’m wondering if there was an “aggregate adjustment” downward on a separate line? If what the lender “wants to be at an acceptable level of reserves ASAP” is in excess of the legal limit (and often is) for escrow accounts, there will be a negative amount in a different column of the closing statement.
The #1 question asked most often regarding a closing statement is “What is this negative aggregate adjustment?” The lender can’t escrow as much as they “want”…there is a limit to what they are allowed to “want”. The “official” answer is:
“RESPA does not require lenders to maintain a cushion. The RESPA statute and regulations do not require the lender to maintain a cushion. However, since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lesser amount, the lesser amount prevails.”
Because the norm is 2 months and that $400 is almost 6 months, I’m wondering if there was a negative number on a different line on the closing statement to conform to legal limits?
P.S. As to why the lender required it in this case, usually it has to do with the history of insurance claims. In this case it is not the paid claims, but the unpaid claims, that exacerbates this issue.
http://www.privacyrights.org/fs/fs26-CLUE.htm
The name of that report when ordering it from the specific HOA insurance provider is not CLUE Report, but similar result. A list of claims showing which were denied and which were paid. If the Master Policy shows a bunch of “denied” claims, meaning the liability shifted to the unit owner vs. HOA, that could account for the additional unit insurance request.
Are insurance companies still using the clues report? I remember when that first came out, it was quite a controversial topic…and this is the first time I’ve seen it mentioned in a long time.
I used “clue” report because it had an easy link 🙂 The “real” report used is called something else like “a loss run” and I’m sure a lender is entitled to know what problems an HOA has had, especially in todays lending environment. Knowing if there was a huge water intrusion claim is like knowing if a house has a bad roof. Controversial or not…a lender’s gotta do what a lender’s gotta do 🙂
Ardell:
Thanks for chewing on this a bit. Adequate hazard insurance is an issue during purchases, and I agree we have to be on the lookout for it.
Don’t have the mystery unraveled yet. I’ll try and see if there are issues with that, but kind of doubt it.
Sadly, the servicer’s customer service dept is woefully inadequate, and it’s clear this imposed fee is unjustified. I’ll refrain from trashing them by name. Wouldn’t help.
And to reiterate, the issue I am dealing with is not a purchase, or even a refi.
Just another condo/homeowner dealing with a cranky bank. The homeowner is asking for assistance from the loan originator (me), since there aren’t any specialists in fixing messed up escrow accounts! 🙂
Wow! “messed up escrow accounts” is scary.
As I said before, banks went downhill the day they decided they didn’t need Olga the debit and credit matcher upper 🙂 They’ve been winging it ever since…and not doing so well with the winging.
Ardell:
Closer to your subject matter:
Do you have any cases where the lender is actually requiring a separate policy? I have not come across one yet, only where the lender requires proof that the policy is adequate to replace the unit in it’s entirety (walls-in coverage).
Condo Insurers seem to be tweaking their Master policies to comply with Fannie and Freddie guidelines.
No comment until after Friday’s closing 🙂
Here is a link to other borrowers facing a similar problem.
http://tinyurl.com/screwed-up-escrow
Still trying to get it unraveled for my client.
On the bright side…yes, the escrow closed 🙂 I had the seller, not the buyer. First they couldn’t get an FHA assignment, then they switched to conventional 10% down and couldn’t get PMI, then they went back and the FHA problem was rolled out to be effective at a later date and it closed FHA.
As to the subject matter I always felt that HOA insurance only, to close, was clearly not enough to protect the buyer. Not sure about the lender. But clearly not good enough to protect the buyer due to the large deductible on the Master Policy. In the old days when Master Policy was good enough, the deductibles were MUCH lower than they are today. Most HOAs do not have enough in reserves for multiple incidents to be self insured.
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Your article reiterates the importance of having up to date insurance coverage. This is the case for both an association and the condo owner themselves. Not all states are yet requiring individual owners to purchase a policy for the contents but some states like Florida have already implemented these types of laws.