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.