California’s FAIR Plan may save condo associations blacklisted by Fannie Mae

By the fourth quarter of 2023, the program is boosting its insurance policy availability to $20 million per location.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | May 17, 2023

Article originally posted in Orange County Register on May 11, 2023.

Dear Fannie Mae: I might have found a unicorn for all the California condos you’ve blacklisted.

Please meet the fine folks at the California FAIR Plan, a home insurance association. And please meet the fine folks at the California Department of Insurance, including Insurance Commissioner Ricardo Lara. They just might have a novel idea to solve the 100% property replacement coverage conundrum for condo associations across the state.

Some background: Since the unspeakable tragedy of the Champlain condo collapse on June 25, 2021, Fannie Mae has been adding more and more condo associations across California and the U.S. to a secret “do not lend list.” As it concerns mortgage lenders and mortgage servicers, Fannie refers to this blacklist as the “unavailable condo list.”

I don’t agree with this policy on keeping the under-insured condo list secret. It’s condescending considering all the stakeholders it affects, especially would-be first-time homebuyers. That said, I completely support the broader concept of requiring 100% replacement insurance coverage. After all, it’s going to land at America’s taxpayers’ toes if Fannie Mae must write off mortgages in the event of another such tragedy.

If you don’t already know, the California FAIR Plan Association was created back in 1968 to meet the needs of California homeowners and business property owners unable to find insurance in the traditional marketplace. The FAIR Plan is not a state agency, nor is it a public entity. There is no public or taxpayer funding.

The FAIR Plan is a syndicated fire insurance pool comprised of all insurers licensed to conduct property/casualty business in California. It’s primarily funded by the policies it sells, the DOI said. Since 1994, rates paid by FAIR Plan policyholders have been adequate to pay claims, the department said via email.

By the fourth quarter of 2023, the FAIR Plan is boosting its insurance policy availability to $20 million per location. The action, a first in nearly two decades for the FAIR Plan, came after wildfires wiped out thousands of homes in California and caused many insurers to balk at coverage in high-fire-risk communities.

The plan likely can’t solve every condo association’s insurance gap such as Laguna Woods’ $1 billion shortfall. But perhaps it will provide enough additional insurance to cover HOAs with smaller replacement coverage gaps.

Does Fannie Mae know about the FAIR Plan? I got the impression from Michael Soller, deputy commissioner of press relations at the California Department of Insurance, that the two agencies haven’t spoken.

“Freddie Mac could use this, but we want them (HOA insurance shoppers) to check with Freddie,” Soller told me. Has California’s DOI spoken with Freddie? I asked Soller. “Not that I’m aware of,” he replied.

My original query to the DOI stemmed from a Freddie Mac Industry Letter dated May 8 and titled Property Insurance Requirements and Coverage Amounts for Condominium Projects. At the top of the page it reads, “This letter was intended to address recent seller/servicer inquiries related to the reduced availability of Condominium Project insurance and does not announce any changes to our requirements.”

Fannie holds the secret list. To my knowledge, Freddie does not separately maintain a do-not-lend condo list.

The FAIR Plan offers both individual coverage for condominium owners and commercial coverage for condo owners’ associations. For a condominium owner, the FAIR Plan covers personal property and improvements.

A condo owner can buy what’s called a “difference in conditions” policy along with FAIR Plan in order to have walls-in coverage for the internal space and the owner’s property as most HOA coverage for condos ends at the studs. FAIR Plan does not include “equivalent coverage,” which includes liability, theft, ice or snow damage and other perils, according to Soller.

So, how much does Fannie matter to condo sales? The agency pulled the plug on its Laguna Woods approval as of Jan. 31. Looking back to 2022, the village recorded 18 financed condo sales in April 2022. Fast forward to this April, and it had just four financed sales, according to Lawyers Title Co. That’s nearly an 82% drop in volume. And, for those four folks buying this April, how much more did they have to pay in their mortgage rate for the privilege? Fannie and Freddie matter hugely when it comes to condo financing.

Full disclosure: My firm, Mortgage Grader does business with Lawyers Title Co.

Both mortgage giants were radio silent to my queries about the California FAIR Plan.

Next week: California FAIR Plan’s premiums for insurance shoppers. Will $400 million of aggregate loss retention be enough to cover catastrophic events? How long will it take to replenish the fund and make good on claims?

Freddie Mac rate news: The 30-year fixed rate averaged 6.35%, 4 basis points lower than last week. The 15-year fixed rate averaged 5.75%, 1 basis point lower than last week.

The Mortgage Bankers Association reported a 6.3% mortgage application increase from last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $486 less than this week’s payment of $4,519.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.5%, a 15-year conventional at 5.25%, a 30-year conventional at 5.75%, a 15-year conventional high balance at 5.875% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.125% and a jumbo 30-year fixed at 6.375%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year FHA fixed rate at 4.99% with 2.375 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.