Tracking Hazard Insurance for Condominiums

Transcription

1 Tracking Hazard Insurance for Condominiums A better solution is available Robert Shekell Senior Vice President, Client Development and Industry Relations May 1, 2015 Originally published in Servicing Management, May 2015.

2 Background Investor guidelines are established to ensure assets are serviced effectively, to minimize risk and investor exposure, and to create consistency in servicing standards. Nationwide best practices in the mortgage origination and servicing areas are created based on these guidelines. As the leading sources of residential mortgage credit in the United States, Fannie Mae ( FNMA ) and Freddie Mac ( FHLMC ) requirements often become the standard upon which other investors develop their own guidelines. Condominiums (or condos as they are more commonly referred to) present unique challenges relating to insurance coverage compliance. FNMA and FHLMC have condominium insurance tracking standards that have proven to be operationally difficult-to-comply-with based on the dependency of cooperation from HOA s and their commercial insurers who are not legally obligated to comply with the investor s requirements. As investors continue to evaluate their requirements, consideration should be given to more effective and efficient methods of ensuring that condos are sufficiently protected without increasing servicer costs or borrower irritation. These requirements include FNMA Servicing Guide Announcement SVC ( Condominium Insurance Requirements ) which states that the servicer must obtain the insurance policy as well as all of the necessary schedules, endorsements, statement of values, or other associated documents to appropriately evaluate the insurance coverage. Annually or at the time of policy renewal, the servicer must confirm the insurance coverage provided under the policy remains in force for units covered and continues to meet the [FNMA] requirements. The amount of insurance coverage must equal the total replacement cost of the building, including the value of each condominium unit. The policy, in the form of an association policy or a unit owner policy (commonly referred to as a HO-6 policy), must cover fixtures, equipment, and replacement of improvements and betterment coverage to cover any improvements that have been made inside the individual unit. This places the burden on the mortgage servicer to obtain and review full copies of the homeowner association master policies ( HOA Master Policies ) and in many cases the individual unit owner policy (HO-6 Policy). As investors continue to evaluate their requirements, consideration should be given to more effective and efficient methods of ensuring that condos are sufficiently protected without increasing servicer costs or borrower irritation. Problem Statement Obtaining the HOA Master Policy from the insurance agent, and in many cases the HO-6 Policy from the borrower, and reviewing its terms and Tracking Hazard Insurance for Condominiums: A better solution is available 2

3 conditions to verify that the coverage complies with the investor s Condominium Insurance Requirements is nearly an impossible task when the providers of those policies are not legally obligated to provide this information. Servicers are often unable to obtain the HOA Master Policies because the borrower or servicer is not listed as a beneficiary on the Master Policy. In many cases, insurance agents and carriers refuse to provide a full copy of the policy to a person that is not a named insured on the policy. In the best situation, the servicer may only receive an Evidence of Insurance form which rarely provides sufficient information to verify if the coverage complies with all investor requirements. The results of various pilot programs where agents or carriers were requested to provide copies of the HOA Master Policies have proven unsuccessful, resulting in servicers unable to demonstrate compliance with their investor s condominium insurance requirements. Because the servicer has not obtained a copy of the HOA Master Policy, servicers must continue to send additional letters to borrowers requesting that they timely provide evidence demonstrating that acceptable insurance is in force to avoid the servicer obtaining lender placed condominium insurance.... many in the industry believe a reasonable alternative to investor s current condo insurance requirements is necessary. Industry Support Servicers understand and share in the desire to adequately protect the collateral against uninsured loss. However, many in the industry believe a reasonable alternative to investor s current condo insurance requirements is necessary. Fortunately, a viable solution is available. Existing Challenges Related to Condo Insurance Verification 1. Inability to obtain proof of required condo coverage. Neither borrowers nor servicers are direct beneficiaries of an HOA Master Policy and therefore, are not named or copied on the policies. The servicer is dependent on the insurance agent s cooperation to provide required documentation of the condominium insurance coverage. Many agents feel no obligation to provide this documentation to servicers, unlike policies for residential properties where the borrowers and servicers are the named beneficiaries. Many agents feel no obligation to provide this documentation to servicers. In one pilot program, approximately 6,000 letters were issued to condominium unit owners when the servicer was unable to obtain Tracking Hazard Insurance for Condominiums: A better solution is available 3

4 a copy of the HOA Master Policy. Of these 6,000 letters, full HOA Master Policies were received for only 129 (2.2%) and Certificates of Insurance, which often did not provide adequate information to verify the insurance requirements, were received for only 570 (9.5%). A large number of letters were received from insurance agents declining to provide the requested documents, indicating that they did not have an obligation to do so or that the cost of providing a full HOA Master Policy was prohibitive. In most instances, no responses were received. 6, (2.2%) 570 (9.5%) Letters sent Full HOA Master Policies received Certificates of Insurance received (inadequate information) 2. Difficulty in determining adequate replacement cost coverage as required by investor guidelines. As difficult as it is to obtain the HOA Master Policy, obtaining the policy does not satisfy the investor s insurance requirements. The servicer must review the policy documents to determine if adequate coverage for each unit is provided by the HOA Master Policy. Determining if the policy provides adequate coverage requires calculation of the per-unit-coverage amount. Certificates of Insurance and ACORD forms, often received as evidence of insurance, do not always provide the level of detail that is necessary to calculate the unit coverage. Even when a HOA Master Policy is received, these documents are not standardized and vary widely, making it difficult to determine if the required coverage and policy terms and conditions comply with requirements. The servicers must review the policy documents to determine if adequate coverage for each unit is provided by the HOA Master Policy. 3. Cause of borrower irritation and creation of servicer ill-will. Continued letter requests to borrowers for information they are often unable to obtain causes aggravation and a bad customer experience. Unlike confirmation of condo flood insurance coverage, generally based on standardized policy forms, condominium hazard insurance policy forms are not standardized and confirming compliance with fixtures and equipment and betterments and improvements requirements is often difficult, if not impossible. Experience has demonstrated that many unit Tracking Hazard Insurance for Condominiums: A better solution is available 4

5 owners do not understand these requirements and will simply ignore requests for information since they believe this is the association s responsibility. When borrowers can provide verification of coverage, they may not be able to obtain it within the investor-required time period. These delays are caused by confusion on the part of the unit owner, failure of the HOA to respond timely, and often uncooperative insurance agents or carriers who may require longer periods for the issuance of new or renewal HOA Master Policies. 4. Individual unit replacement cost coverage is difficult to determine. It can be very difficult for the loan originator or servicer to determine if the HOA Master Policy documentation they receive includes coverage for individual unit fixtures, equipment, and replacement of improvements and betterments. Upgrades and changes to the unit may not be discernible after the model units are sold and time has elapsed. This can make replacement cost coverage a guessing game since the HOA Master Policies do not indicate values based on the individual unit. Determinations of individual unit values may be based on simple averages and not accurately reflect the true value of the individual unit. Without knowing the value of the individual unit, the servicers cannot ensure absolute protection of each unit s replacement value, leading to increased investor exposure. Replacement cost coverage can be a guessing game since the HOA Master Policies do not indicate values based on the individual unit. Adequate unit coverage requirements periodically change and are often difficult to determine. In 2008 Fannie Mae published guidelines (Ann : Project Eligibility Review Service and Changes to Condominium and Cooperative Project Policies (12/16/08)) requiring that a H0-6 unit owner policy must provide coverage in an amount that is no less than 20 percent of the condominium unit s appraised value. Servicers expressed concern that this method may not provide sufficient coverage and was not always equitable. Appraised values reflect many things other than replacement costs, such as the unit s location, elevation, views, proximity to water, golf courses, etc., that may not have a true impact on the individual unit s replacement cost in the event of a loss. Requirements for condo unit coverage were updated in 2011 (Fannie Mae SVC ) for new condominium loans applied for on January 1, 2012 or later. These guidelines indicated that the HO-6 must provide coverage, as determined by the insurer that is sufficient to repair the condominium unit to at least its condition prior to a loss claim event. This essentially means that the servicer can rely upon the insurer to determine the Tracking Hazard Insurance for Condominiums: A better solution is available 5

6 adequate amount of insurance coverage for the unit. It also means that the servicer may not always be able to confirm that adequate coverage has been obtained. Blanket Condo Coverage Offers a Viable Solution to the Current Condo Guidelines Servicers can now rely upon a more effective and efficient protection option when HOA Master Policies cannot be obtained. Servicers may purchase Blanket Condominium Policies ( Blanket Condo Coverage ) to protect against uninsured loss to condominium units within their servicing portfolio. Blanket Condo Coverage is available through top-tier, highly capitalized insurance providers that extend coverage to protect against uninsured loss when there is either no HOA Master Policy or the coverage is inadequate to protect the individual unit. The protection afforded under a well-constructed and comprehensive Blanket Condo Coverage provides servicers and investors significant protection at a substantially lower cost and with less customer irritation than the continued reliance on lender placed condo insurance policies. Compliance with current investor guidelines for condominium insurance often diverts significant servicer staff and resources (technology changes, cash advances, etc.) to enforce a requirement that is proving a minimal benefit at best, and results in increased servicing costs and customer irritation. The protection afforded through Blanket Condo Coverage alleviates these issues, while providing sufficient protection to servicers, borrowers and investors. Next Steps Given the many competing priorities for resources within a mortgage servicing organization, the industry hopes that investors will agree that Blanket Condo Coverage is a viable and compliant solution to protect against uninsured condo losses. Servicers and investors continue to discuss the viability of this option and there is optimism that this alternative solution will be accepted by investors. In the meantime, servicers are encouraged to voice their support for and to advance the merits of this much-needed-solution. When selecting Blanket Condo Coverage, servicers should ensure that it provides at least the following benefits: Transferability of uninsured condo unit loss protection for up to 60-days upon loan sale or servicing transfer, allowing the new servicer time to secure adequate protection. Uninsured condominiums units are protected regardless of occupancy or vacancy, including coverage for non-owner occupied units. The unit is fully protected, including fixtures and equipment and betterments and improvements, as required by the GSEs. Losses are settled on a replacement cost basis. Loss Assessment coverage, which may be levied by the HOA against unit owners following an uninsured or underinsured property loss, should be provided for at least $5,000, with optional higher limits available. Tracking Hazard Insurance for Condominiums: A better solution is available 6