Matthew Winton's Condo & HOA Blog

Matthew L. Winton to present at Oklahoma Bar Association Continuing Legal Education seminar

On September 14, 2011 in Oklahoma City and September 15, 2011 in Tulsa, community association lawyer Matthew L. Winton will present materials on the topic "Drafting Real Property Covenants, Conditions, and Restrictions: Tips, Tricks, and Traps." Information at the seminar will include: condominium and homeowners association law, governing documents, drafting issues, and amendments. More information and registration may be found on the Oklahoma Bar Association website: http://www.okbar.org/cle/2011/2011-09-14seminarID1930.htm.

New FHA Condominium Underwriting Guidelines

Summary of FHA Condominium Project Approval and Processing Guide (June 30, 2011)

1. Summary. On June 30, 2011, the Federal Housing Administration (FHA) updated its underwriting guidelines for condominium projects in which mortgage loans would be placed that are insured under the National Housing Act. These guidelines and requirements are significant for Oklahoma condominiums. What follows is a summary of the new guidelines.
2. Recertification. Under the Guide, a condominium must recertify, including its financial and insurance information every 2 years.
3. Financial Documents. The financial requirements under the Guide are set out below under the Guide's section numbers:

2.1.5 Delinquent Homeowners Association (HOA) Dues

This requirement must be reviewed as part of the analysis for project approval and must also be verified as part of the loan level requirements. No more than 15 percent of the total units can be in arrears (more than 30 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).

 

Exception requests may be considered on a case-by-case basis by the jurisdictional HOC. No exception requests can be processed under the DELRAP option. FHA reserves the right to reject any exception request received. Requests may be considered as noted below. However, based on the HOC review, additional information and / or documentation may be required.

 

No more than 20 percent of the total units can be in arrears (more than 30 days past due) if FHA reviews the documentation at project approval and determines that tolerance of the higher percentage is warranted.

 

The following requirements must be met:

 

• The HOA provides a report for the past six months that reflects the history of unpaid assessments.
• The HOA current reserve fund balance and current operating results (documented HOA Balance Sheet and Income/Expense financial statements dated less than 90 days at the time of submission) evidences excess available funds in the amount of the outstanding arrearage.
• A review of the HOA financial statements and verification of the reserve account balance reveals that the HOA has sufficiently accounted for bad debt and arrearages.
• A current reserve study that is no greater than 24 months old supports the sufficiency of the current HOA assessments to meet the project component replacement needs.
• The HOA provides evidence of actions to collect the unpaid arrearages, including legal action, execution of payment plans, or other similar efforts. The exception terminates with the expiration of the current condominium project approval.

 

 

2.1.6 Budget / Financial Documents

 

Provided in the chart below are the defined financial documents required for review.

 

Project Type	Requirement
Proposed	Current year projected budget Bank statements may be requested
Under Construction	Current year projected budget If a project is built in legally declared phases, an actual year to date budget is required Bank statements may be requested
New < 12 months old	Current year budget for declared phases Current balance sheet Bank statements may be requested
Existing > 12 months old	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.

 

Note: FHA or the DELRAP mortgagee may require submission of additional financial statements to complete the condominium project approval review.

 

 

 

 

2.1.7 Special Assessments

 

The project submission documentation must include information regarding special assessments. A signed and dated explanation for any assessment must be provided by the builder, developer, sponsor, homeowners association or management company and must answer the following items:

 

• What is the purpose of the assessment;
• Does the assessment affect the marketability of any of the units; Have other special assessments been required (if the answer is yes, complete explanation regarding the purpose and timing of those assessments must be provided);
• When is the assessment to be paid (i.e., required to be pre-paid or is it payable over a specified period of time);
• How is the overall financial stability of the project impacted by the assessment; and
• What impact will the assessment have on the future value and marketability of the property?

 

Note: The above list of items considered when reviewing and analyzing current or pending special assessments is not all inclusive; any additional

 

1. Insurance. As with the new financial documents requirements, the Guide provides for certain minimum insurance requirements.

2.1.9 Insurance Requirements

 

The condominium project must be covered by hazard, flood, liability and other insurance required by state or local condominium laws or acceptable to FHA. The mortgagee is required to thoroughly review the policy and all endorsements to ensure that the policy covers the following requirements. For proposed or under construction projects, the below insurance requirements are not applicable until the first unit within the project is sold.

 

Insurance Type	Requirement
Hazard Insurance (project approval)	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.
HO-6 (loan level)	The unit owner is required to: Obtain a "walls-in" coverage policy (HO-6) if the master or blanket policy does not include interior unit coverage, including replacement of interior improvements and betterment coverage to insure improvements that the borrower may have made to the unit.
Liability (project approval)	The homeowners' association is required to: Maintain comprehensive general liability insurance covering all of the common elements, commercial space owned and leased by the owners' association, and public ways of the condominium.
Fidelity Bond/Fidelity Insurance – may also be known as "Employee Dishonesty" or "Crime Policy" (project approval)	For all new and established projects with more than 20 units, the homeowners association is required to obtain and maintain this insurance; The homeowners association must maintain this insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association; The coverage must be no less than a sum equal
	to three months aggregate assessments on all units plus reserve funds unless State law mandates a maximum dollar amount of required coverage.   If the homeowners association engages the services of a management company, the homeowners association must require the management company to maintain this insurance coverage for its officers, employees and agents handling or responsible for funds of, or administered on behalf of, the owners association. The required coverage must meet the following requirements: Must name the owners association as an obligee; Must be in an amount not less than the estimated maximum of funds, including reserve funds, in the custody of the owners association or management agent at any given time during the term of each bond; In no event may the aggregate amount of such bonds be less than a sum equal to 3 months aggregate assessments on all units plus reserve funds unless State law requires a maximum amount of required coverage.
Flood (project and loan level)	The homeowners' association is required to obtain and maintain: Coverage equal to the replacement cost of the project less land costs or up to the National Flood Insurance Program (NFIP) standard of $250,000 per unit, whichever is less; The maximum limit of building insurance coverage of a residential condominium building in a regular program community is $250,000 times the number of units in the building (not to exceed the building's replacement cost); The homeowners association, not the borrower or the individual unit owner, is responsible for obtaining and maintaining adequate flood insurance under the NFIP on buildings located in a Special Flood Hazard Area (SFHA); and The flood insurance coverage must protect the interest of borrowers who hold title to an individual unit as well as the common areas of the condominium project;

 

Project approval will not be issued if any portion of the buildings and / or common elements is located within a SFHA unless the requirements of section 2.1.10 are met.

 

2.1.10 Determining Need for Flood Insurance

 

Mortgagees must determine whether the property improvements (dwelling and related structures/equipment essential to the value of the property and subject to flood damage) are located in a 100-year flood plain. If the property is in a 100- year flood plain, flood insurance is required, per Mortgagee Letters 2009-37 and 2010-43. To demonstrate and document that the property is not located in a 100- year flood plain and not subject to flood insurance requirements, the mortgagee must obtain:

 

1. A final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) that removed the property from the Special Flood Hazard Area (SFHA) location is obtained from the Federal Emergency Management Agency (FEMA); or

 

2. If the property is not removed from the SFHA by a LOMA or LOMR, the lender must obtain a FEMA National Flood Insurance Program Elevation Certificate (FEMA from 81-31 "elevation certificate") prepared by a licensed engineer or surveyor documenting that the lowest floor (including the basement) of the residential building and all related improvements / equipment essential to the value of the property is built at or above the 100 year flood elevation in compliance with the National Flood Insurance Program (NFIP) criteria as required in 44 CFR 60.3 through 60.6. An elevation certificate is acceptable for condominium projects that are 100 percent complete, including all common elements and amenities.

 

Insurance under the NFIP is not required if a LOMA or LOMR is obtained from FEMA removing the property from the SFHA.

A flood elevation certificate is not required when a LOMA or LOMR

removes the property from a SFHA.

Insurance under the NFIP is required when a flood elevation certificate documents that the property remains located within a SFHA.

Condominium & Homeowner Associations: Insurance Articles

For those needing or seeking information regarding condominium and homeowner association insurance issues, last month's Cooperator contains several excellent articles. The August Cooperator edition contains articles on:

• Association Directors & Officers Insurance
• Specifics on particular insurance clauses and their meaning
• Finding the right insurance policy for common elements and units
• How to navigate and administer an insurance claim
• Information on NAMIC, the National Association of Mutual Insurance Companies, which is the nation's largest trade and political advocacy group for property/casualty insurers