Freddie Mac to Fund Only Quake-Insured Units
QUESTION: Our homeowner association manager recently told our board of directors that our association would have to obtain earthquake insurance soon so that individual units can qualify for mortgages. Our association, which is located in Kern County, has been unable to obtain earthquake insurance. Will this affect my ability to obtain refinancing? Where can I find more information? How can we individual unit owners have a voice in these changes that could affect all of us in the very near future?
ANSWER: It is difficult to predict whether recent changes in the secondary mortgage market will have an impact of the availability of refinancing for your unit. I recently attended a Sacramento legislative symposium for community association leaders at which many people expressed great concern about the scarcity of earthquake coverage for community associations, the future uncertainty regarding loan availability, lender loan packaging requirements and possible refinancing repercussions.
One of the largest secondary mortgage lenders in the country, the Federal Home Loan Mortgage Corp. (Freddie Mac), recently announced that mortgage funding for individual condominium units in California after July 1, 1995, will be based upon the condominium association having obtained earthquake insurance coverage.
In addition, the condominium association will have to provide documentation that they have sufficient funds to cover the earthquake insurance deductible which, in most cases, amounts to 10% of the total replacement cost of the structure.
The impact on low- and moderate-income home buyers could be disastrous. Freddie Mac, a federally charted organization, buys mortgages from banks and other lending institutions. This new Freddie Mac requirement will probably have a chilling effect on California mortgage lending in a real estate market that has been in the doldrums for an extended period of time. Lenders may be reluctant to fund mortgages that Freddie Mac will not purchase.
To implement the new procedures, Freddie Mac has divided California ZIP codes into low-, medium- and high-risk categories. Only the condominium associations located in low-risk ZIP codes are exempt from the earthquake insurance requirement. All major urban centers are affected since all of Los Angeles County and Ventura County and most of San Bernardino County, Orange County, San Francisco Bay area and San Diego are in the moderate- and high-risk categories. To find out the rating for your ZIP code, you can call Freddie Mac at (800) FREDDIE.
If you are able to provide data about the age and type of construction, the Freddie Mac representative will inform you of the earthquake insurance requirements for your particular association. You will subsequently receive a written confirmation by mail. The information that you provide to the Freddie Mac representative should include the year your complex was built, the type of construction (wood, concrete, steel, reinforced masonry or unreinforced masonry), number of stories and type of parking (tuck-under, subterranean or multilevel above-grade).
A seller can also obtain a waiver of the earthquake insurance requirement even in the high- and moderate-risk areas under certain circumstances. The condominium association must contact Freddie Mac’s risk analysis adviser, Risk Management Solutions Inc., at (800) 767-9131. Risk Management Solutions provides a document called a Site-Specific Earthquake Risk Analysis. A fee is charged for this service.
Jim R. Lane, president of the Woodbridge Park Assn., a community association in Ventura, lists several reasons why he feels that requiring earthquake coverage for all associations in his area is unfair. “The Freddie Mac requirement affects homeowners and properties that have never been, or may never be, purchased using a Freddie Mac mortgage. The policy is the epitome of unfairness to the portion of the real estate market least able to afford it. It is redlining by ZIP code and affects only California common-interest developments even though earthquakes occur in other states too. It does not apply to single-family homes, does not apply to other types of disasters (fire, flood, hurricane, mudslide, volcano), and shows a lack of understanding on the part of Freddie Mac about how homeowner associations are governed and operated.”
The Community Assns. Institute, a national nonprofit organization that provides education and resources for the effective operation of condominium and homeowner associations, and the California Assn. of Realtors are leading a campaign to inform legislators and the state attorney general of the need to investigate and forestall this change in Freddie Mac procedures.
The California Assn. of Realtors says that in 1994 first-time home buyers accounted for 49% of all home sales in California and 17% of those first-time buyers purchased condominiums. Eleven percent of California’s repeat buyers purchased condos last year. Condominium sales accounted for 15% of all home sales in 1994.
Three bill have been introduced in the state Senate that would curtail Freddie Mac’s territorial underwriting requirements based upon ZIP codes or would stipulate that any lender requiring earthquake insurance must make full disclosure that some lenders are not requiring earthquake coverage. Each of the bills is categorized as “urgent” meaning that they will take affect immediately if they are approved.
