CCAL Law Conference — Financing Availability

Over the past several years, many changes have taken place in real estate financing; one of the less publicized areas of change deals with the availability of financing for community associations.  Lenders and underwriters are changing the way they review and approve those associations that can get federal mortgages.
The panelists for today’s town hall meeting on mortgage financing eligibility include DeLynn Conley, Senior Risk Manager, Project Standards, Fannie Mae; Loura K. Sanchez, Esq., CCAL, Stephen M. Marcus, Esq., CCAL; and George E. Nowack, Esq., CCAL.
FHA Loans
FHA loans are now 30% of the market.  On February 1, spot loans will no longer exist.  Previously, questionnaires would be distributed, and largely ignored.   However, starting on February 1, associations will need to be approved, and those approvals will be expensive to obtain.
There are 3 mortgagee letters that have been issued.  Mortgagee letter 46b provides two methods for approval; currently, all applications are being sought through the FHA.
There are many documentary requirements on applying for certification.  An attorney’s opinion is not required by FHA, but is left to the lender or developer.  The developer or lender may, in turn require a letter.  That opinion will require, in theory, that an association complies with “all applicable laws and regulations…”
Rights of first refusal will be allowed, if not discriminatory.
FHA may have an advantage with respect to pre-sale requirements; in connection with FHA, it will be at 30% through the end of 2010.
FHA used to limit its involvement in a project to 10%; that will be increased to 50% through 2010.  Thereafter, it will decrease to 30%.
FHA appears to have removed legal document requirements, other than a transition limitation.
FHA will be reviewing budgets, and an inclusion of deductible funding for insurance deductibles.
FMAC will follow FNMA and FMAC requirements; FNMA will require 10% reserve funding and deductible coverages for insurance.
Insurance Requirements
FNMA requirements now require insurance to cover 100% replacement cost, including replacement of the Units.  This can be a guaranteed replacement cost policy, or a policy with a replacement cost policy with an agreed value endorsement to cover any coinsurance gap.
Under the new rules, a borrower becomes involved in connection with betterments and improvements.  If the association policy doesn’t cover betterments and improvements, there will be a gap.
Bare Walls – the association’s policy will cover only replacement of the drywall or plaster, and none of the fixtures or improvements.
Single Entity – the most typical coverage, according to Nowack.
All-In  — the association’s policy will cover and replace all contents of the unit, including the improvements and betterments.
If the association does not cover with all-in coverage, the owner must obtain a “walls in” policy.  (Which would be a standard HO-6 policy.)  The policy must cover, at a minimum, 20% of the appraised value of the Unit.  A major problem with this, of course, is that the value of a Unit may well include intangibles such as a view.
Another new insurance requirement is fidelity coverage; the association needs to have a minimum of three months of aggregate assessments, and an amount equal to all of the association’s reserves.
What Next?
Steven Marcus is suggesting that associations be proactive prior to February 1 to obtain certifications; Project Approvals out of Philadelphia is one possible source.
Associations involved in litigation, and associations with special assessments in place, will be reviewed on a case-by-case basis.

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