If you own a condominium, town home or a unit in a Planned Unit Development (PUD), Fannie Mae has announced a new rule that will directly affect you concerning your insurance coverage. In the case of single family detached residences, a basic insurance policy covers everything, but when it comes to condos and similar properties, this may not be the case.
In insurance terms, there are three classes of assets in any home:
The exterior structural components (walls, roof, foundation).
Personal property (furniture, art, books, clothing, personal possessions).
Interior items attached to the home (plumbing fixtures, cabinets, interior doors, appliances like refrigerator, washer/dryer, furnace, light fixtures, wall coverings, flooring and bathroom fixtures.)
When it comes to insuring the structural components of a condo, it will be covered by the master insurance policy of the Homeowners Associations (HOA). By law in the majority of states, HOAs are required to have a “bare walls” policy, though they are not required to exceed that coverage. The majority of people have insurance policies that cover their personal possessions. However, the third class of asset does not often occur to people. The second class of assets includes all of your personal property including furniture, art, books, clothing, and other personal possessions. You probably already have this kind of policy.
Many people assume that their HOA insurance policy will cover these items, and some do, though the coverage may be minimal. However, they are not required to do so by law.
What does this mean? In the event of a catastrophic event, like a destructive fire or tornado, the HOA policy would pay to rebuild the exterior structure, your “bare walls,” but would not pay to rebuild the interior. If the HOA policy has minimal coverage for interior fixtures, in the large majority of cases, the fixtures that money would pay for would be far inferior to the original, lost fixtures.
Fannie Mae and Freddie Mac have taken notice of this gap in coverage and are taking steps to close it. Now, borrowers must provide an HO-6 policy which includes “walls in” coverage, equal in coverage to 20% of the appraised value of the home.
Critics of the new rule say that the coverage should be required to be 20% of the value of the improvements, leaving out the value of the land on which the house stands, which would be included in the total appraised value of the home. For example, a condo owner in a desirable area may find their land is 50% of the total value of their home.
This would mean 20 percent of the appraised value is over twice what 20 percent of the value of just the improvements is. This requirement may also be in conflict with state laws which forbid lenders from requiring more insurance than the realistic insurable value of a home. These laws say that owners can not be forced to purchase “excess” coverage, but Fannie Mae will not fund a loan without this 20% coverage. The potential for conflict between the lender requirements and state law is high in this case.
While this new requirement only applies to new loans at the moment, there is potential for Fannie (and Freddie) to start directing loan servicers to ensure each property for which they service loans has this same level of coverage. As a condo owner, you should be prepared for this possibility. Take this opportunity to look over the HOA master insurance policy and sit down with your insurance agent to make sure your home is adequately insured.
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