Fannie Mae/Freddie Mac recently released coordinated updates to their lending standards. These updates were made in response to concerns from industry partners about lenders and servicers’ ability to comply with certain property insurance requirements. The goal of these measures is to reduce documentation burdens while maintaining minimum coverage standards.
Although Fannie Mae/Freddie Mac does not impose direct obligations on your Association, their requirements are viewed as the national standard, so if your Association is not in compliance, your property may not qualify for conventional financing. Not qualifying for conventional financing can reduce financing options for prospective buyers, negatively impact property values, and limit marketability within the community. This article provides guidance to help your Association stay in compliance.
The update included changes to project eligibility standards and property insurance requirements. Broadly, the major changes to property insurance include new deductible requirements and reduced documentation to prove adequate coverage. For project eligibility, there is an increase in reserve requirements and change in reserve study requirements. This article will outline the updates to property insurance standards and provide next steps for your Association. For more information on project eligibility updates see: link.
Property Insurance Updates
Main takeaways:
- Effective immediately, Associations have more ways to prove their master policy covers 100% of replacement cost value, or cost to rebuild.
- Effectively immediately, there are no longer requirements that roofs be insured on replacement cost basis and that projects carry inflation guard coverage.
- Beginning July 1, 2026, the maximum deductible under a Condominium Association master policy is $50,000.
- It’s Easier to Prove Associations Have Enough Coverage
Under the current standard, lenders often had to obtain and review insurance appraisals, replacement cost calculations, and other documentation showing that the policy limit matched the replacement value of the buildings. This standard made it challenging to prove what the replacement cost actually was.
Under the new standard, lenders can rely on guaranteed replacement cost coverage, extended replacement cost coverage, or insurance appraisals to be insured for 100% of replacement cost value.
- Guaranteed replacement cost coverage is when the insurer agrees to pay whatever it costs to rebuild, even if the policy limit is too low.
- Extended replacement cost overage is a step below guaranteed replacement cost coverage and is when the insurer agrees to pay above the policy limit by a set percentage, often 20%-50%.
Associations should work with their insurance broker and carrier to ensure that sufficient documentation is available to demonstrate compliance with Fannie Mae and Freddie Mac requirements.
The practical takeaway – A simple statement or estimate from your insurer may now be enough to satisfy lending requirements.
Retiring the Requirement to Insure Roofs on a Replacement Cost Basis
There is no longer a requirement that roofs be insured on a replacement cost basis. Roofs must still be insured, but they may now be covered on an actual cash value basis, which factors depreciation into the amount paid for a loss.
A replacement cost basis means that the insurance policy is intended to pay the cost of repairing or replacing property with new property of like kind or quality. For example, consider a roof that was installed 15 years ago and originally cost $20,000. Because of age and wear, its actual cash value today might only be $8,000. If the roof is damaged by a covered loss:
- Under a replacement cost policy, the insurer may pay the full cost to install a comparable new roof.
- Under an actual cash value policy, the insurer would typically pay only the depreciated value.
The benefits of actual cost coverage are lower premium costs, which are less expensive and easier to obtain. On the other hand, if damage occurs, insurance proceeds may be insufficient to fully repair or rebuild the property, leaving unit owners responsible for the shortfall. Thus, Associations should work with their insurance broker to see what type of coverage is best for their property.
Retiring the Requirement that Projects Carry Inflation Guard Coverage
There is no longer a requirement that projects carry inflation guard coverage. Inflation guard coverage is an insurance feature that automatically increases your policy limit over time to account for rising construction and replacement costs due to inflation.
Fannie Mae/Freddie Mac eliminated the requirement after receiving industry feedback that certain insurance requirements were difficult to administer and verify. Eliminating the requirement may provide more flexibility when shopping for insurance or renewing policies. However, without inflation guard, a policy written a year ago may be outdated by the time of a loss. Thus, Associations should work with their insurance broker to see what type of coverage is best for their property.
Deductible Requirements
Beginning July 1, 2026, the maximum deductible under a condo association master policy is $50,000 per unit. When a master policy carries a per unit deductible, each unit owner must carry their own condo policy (an HO-6 policy). Under the new rule, if a master policy has a per unit deductible, unit owners must obtain an HO-6 policy that provides coverage at least equal to deductible exposure.
Beyond the initial deductible limit changes, these updates affect individual unit owners and not the Association. As a result of this update, unit owners may request additional documentation from the Association to determine what the master policy covers.
These changes are intended to address the risks associated with large master policy deductibles, which can expose unit owners to significant out-of-pocket costs and special assessments following a loss.
Next Steps for Your Association
- Explore the new coverage options to prove replacement costs to decrease your Association’s required documentation.
- Review whether actual cash value roof coverage and the removal of inflation guard coverage remain appropriate for your Association’s risk profile and insurance budget.
- Ensure your maximum per unit deductible under your master policy is in compliance with the new standard before the July 1st, 2026 deadline.
For additional information about the Fannie Mae/Freddie Mac updates, see the Fannie Mae Lender Letter: https://singlefamily.fanniemae.com/media/44986/display.
If your HOA needs legal help, call our Arizona association governance lawyers at Halk, Oetinger, and Brown at (602) 759-9205 for a confidential legal assessment.
