Buyers Need More Financing Options for Condominiums Prepared by Danielle Blake

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1 Buyers Need More Financing Options for Condominiums Prepared by Danielle Blake Affordable housing can mean different things in different markets. In Broward and Miami-Dade Counties in Florida, it usually means condominiums. Condominiums now make up approximately 60% of the local housing inventory. The median condo sale price in Broward is $125,000 and $190,000 for Miami-Dade. Unfortunately, finding financing is difficult for many potential buyers. Lenders are requiring buyers to make down payments from 20% to 30% of the purchase price in order to qualify for a mortgage, if financing is available at all. Requirements such as this make home-buying less realistic for many, particularly for first-time or returning homebuyers. In late 2014, the MIAMI Association of REALTORS organized a task force to increase financing options for condominiums. The Federal Housing Administration s (FHA) insured condo loans are a great option with loans up to $345,000 and a down payment of 3.5%. However, for one buyer to obtain a FHA loan or reverse mortgage, the entire complex must meet the following guidelines*: Minimum Number of Units 2 or more units Right of First Refusal Permitted unless it violates discriminatory conduct prohibitions under the Fair Housing Act regulations at 24 CFR part Non-Residential/Commercial Space - No more than 25 percent of the property s total floor area in a project or unit can be used for non residential / commercial purposes (*exceptions may be granted) Investor Ownership Up to 50% of the units may be owned by one investor/entity (single or multiple owner entities) Delinquent Homeowners Association (HOA) Dues - No more than 15 percent of the total units can be in arrears (more than 60 days past due) of their condominium association fee payments (does not include late fees or other administrative expenses). The 15 percent includes all units (occupied, investor, bank-owned, vacant) Budget / Financial Documents Current year budget for declared phases Current balance sheet less than 90 days old at the time of submission for project approval Actual income and expense statement for project Bank statements may be requested Reserve study that is not more than 24 months old Special Assessments - Documentation regarding any special assessments Pending Litigation - Documentation on any pending litigation Insurance Requirements - Documentation related to hazard, flood, liability, fidelity bond/insurance, and other insurance required by state or local condominium laws or acceptable to FHA 3.5 Owner-Occupancy Requirement - At least 50% of the units must be owner/occupied. * - FHA Condo Guidance from HUD Mortgagee Letters , and

2 Of the 8,523 Condominium Projects in Broward and Miami-Dade Counties, only 28 are approved for FHA financing. Primary Impediments to FHA Condo Approvals The ban of co-insurance on hazard insurance policies and Florida s law allowing condo boards to waive reserves are two very specific impediments to FHA condo approvals. 1. FHA Insurance Requirement Outlined in Insurance Type Hazard Insurance (project approval) Requirement The homeowners association is required to: Maintain 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. Around November 2014, FHA began paying particular attention to hazard insurance after learning that projects were approved with co-insurance. Although the guidance is silent on the term co-insurance, we learned from the agency that this practice is not allowed. Co-insurance is a type of insurance in which the insured pays a share of the payment made against a claim. For a better understanding, see the example below. It is estimated that more than 95% of condominiums in South Florida have co-insurance, consequently being disqualified for FHA insured loans.

3 Co-insurance Calculation Example Insured Property Information Total Insurable Value (TIV): $500,000 Coinsurance: 80% Deductible: $1,000 Partial Loss: $50,000 Inadequate Limits of Coverage Amount of Insurance Carried - Did $350,000 Amount of Insurance Required (TIV x Coinsurance) Should ($500,000 x 80%) Co-insurance Penalty Calculation Factors 1. Did / Should ($350,000 / $400,000) 2. Loss Amount 3. Deductible $400, $50, $1,000 Coinsurance Penalty Calculation: (1. x 2.) 3. (0.875 x $50,000) - $1,000 Amount of Payment (From Co-insurance Penalty Calculation Above) Amount of Co-insurance Penalty (Ignoring Deductibles) (Loss Amount Payment Amount) (Before Deductible) $50,000 - $43,750 $42,750 $6,250 The insured is a co-insurer on this loss in the amount of $6,250. For all partial losses, the insured is only going to be paid 87.5% of the damage amount prior to the application of the deductible. Had the loss been $100,000, the insured would be paid ((0.875 x $100,000) Deductible) which totals $86,500. Again, the insured would be a co-insurer in the amount of $13,500 for the loss. To be fully insured for partial losses in this example, the insured must carry at least $400,000. Carrying adequate limits assures that the insured will not participate as a co-insurer in any partial loss. However, this is true only of partial losses. Even if the insured fully meets the coinsurance requirements spelled out in the policy, it is still underinsured for a total loss. The insured will not be paid more than the applicable limits of coverage purchased; so if the entire building is destroyed, the maximum the insured in the above example will receive is $400,000 and is underinsured by $100,000. After our task force s conference call with FHA, we learned that the agency is unofficially following Fannie Mae s guidance on this topic, which requires agreed amount endorsement (see below). It s extremely difficult to find insurance companies in Florida that will underwrite these policies, forcing Fannie to reexamine their policy. Fannie Mae s Hazard Insurance Requirement: Insurance must cover 100% of the insurable replacement cost of project improvements, including the individual units for condo and co-op projects. Extended Replacement Cost coverage, under which the insurer agrees to pay more than the property s

4 insurable replacement cost, is acceptable. An insurance policy that includes either of the following endorsements will ensure full insurable value replacement cost coverage: A Guaranteed Replacement Cost Endorsement and, if the policy includes a coinsurance clause, an Agreed Value Option or Agreed Amount Endorsement; or A Replacement Cost Endorsement and, if the policy includes a coinsurance clause, an Agreed Value Option or Agreed Amount Endorsement. If a policy includes a coinsurance clause, and includes an Agreed Amount Endorsement or selection of the Agreed Value Option which waives the requirement for coinsurance, the policy coverage will be considered acceptable evidence that the 100% insurable replacement cost of the project improvements requirement has been met. In addition, when a policy includes a coinsurance clause, but the coinsurance provision is not waived, the policy is still eligible if evidence acceptable to the servicer confirms that the amount of coverage is at least equal to 100% of the insurable replacement cost of the project improvements. Our task force has never seen a case of co-insurance and a 100% replacement cost as the amount of coverage is almost always lower than the full replacement cost of the project improvements. The options for coverage are usually only 80% co-insurance, 90% co-insurance, 100% coinsurance or agreed value. Furthermore, FHA does not have a policy to accept pooled or staterun insurance companies and Florida s Citizens Property Insurance Corporation insures more condominium hazard insurance projects than any private entity. Suggested Solutions: On to Set up a conference call with FHA and/or Fannie Mae and Florida s insurance experts to determine if this is simply an education issue; or Set up a meeting in Washington D.C. or South Florida to examine the probable maximum loss of these structures based on past history and consider statistical insurance models to determine an acceptable level of coverage; or Get lawmakers involved.

5 2. FHA Budget/Financial Documents Outlined in Project Type Existing > 12 months old Requirement Current year budget for declared phases Current balance sheet less than 90 days old at the time of submission for project approval Actual income and expense statement for project Bank statements may be requested Review of the financial documents must determine that the budget and operating results are sufficient and: Include allocations / line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; and Provide for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10 percent of the budget; and Provide adequate funding for insurance coverage and deductibles. In cases where the budget documents do not meet these standards, a reserve study may be requested to assess the financial stability of the project. The reserve study cannot be more than 24 months old. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed. Florida law allows condominium associations to waive reserves by a majority vote of members at a duly called meetings under s (2)(f), F.S. Majority of associations in South Florida have elected to do this, disqualifying themselves from FHA financing. Sec (2)(f) Annual budget.- 2. In addition to annual operating expenses, the budget must include reserve accounts for capital expenditures and deferred maintenance. These accounts must include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000. The amount to be reserved must be computed using a formula based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates or extension of the useful life of a reserve item caused by deferred maintenance. This subsection does not apply to an adopted budget in which the members of an association have determined, by a majority vote at a duly called meeting of the association, to provide no reserves or less reserves than required by this subsection Suggested Solutions: File an amendment this legislative session to start the discussion about whether this is a responsible practice. You can either eliminate the option altogether or require a reserve study. The reserve study must state that there are enough in reserves to cover the capital expenditures and deferred maintenance, and therefore, the association may waive the collection of reserves until the reserve levels reach a certain point.

6 Special Thanks to the Task Force Members Albert Martinez, Citibank, N.A. Alexander Pinder, EverBank Carlos Gutierrez, Keller Williams Miami Beach, MIAMI Residential President-Elect Danielle Blake, MIAMI Association of REALTORS Ellen Bithell, REMAX Executive Realty Ginenne Boehm, Berkshire Hathaway Home Services Florida Realty Joel Milian, Keller Williams Realty Partners SW Pines John Loyacono, Bank of America Home Loans Justine Jimenez Garcia, Countywide Properties, Inc. Linda Chambers, Chase Lisa Vizcaino, Royal Homes Realty, Inc. Liza Mendez, Pedro Realty International & Past Chairman of MIAMI Realtors Michael Ortiz, Caliber Home Loans Michelle Rojas, Keller Williams Realty, MIAMI Corporate Governor Nick Foley, Bank of America Home Loans Vilma Lopez, Charles Rutenberg Realty, MIAMI Broward Governor Vivian Macias, Principal Properties Inc., MIAMI Residential Governor