The policy of last resort could help condo associations blacklisted by Fannie Mae because of insurance gaps.
By JEFF LAZERSON | email@example.com | MortgageGrader.com | May 22, 2023
Article originally posted in Orange County Register on May 19, 2023.
Is California on the brink of a homeowners’ insurance crisis?
Last week’s column ended with a question about whether the California FAIR plan insurance fund has enough money to cover catastrophic events, and how long it would take to replenish the fund and make good on homeowner claims.
In the column, I suggested condo buyers and refinance applicants at associations blacklisted by Fannie Mae could get up to $20 million of gap insurance from the FAIR Plan for common area insurance shortages. In some situations, it just might be enough to cover any insurance gap, especially after Fannie Mae upped the ante, requiring 100% replacement coverage following the Champlain Towers collapse in Florida.
First, a correction to last week’s column. FAIR Plan actually has $1.4 billion in “aggregate loss retention,” a measure of coverage for excess losses, for instance, from a bad wildfire. I was previously told the plan had $400 million, according to Michael Soller, the DOI’s deputy commissioner of press relations.
Now, a billion dollars more is certainly far better than $400 million, but how far can that be stretched when (and not if) we have more wildfires like the Camp, Dixie, Glass or Cedar calamities? For example, the total damage and estimated losses from the Camp fire were more than $400 billion.
In the meantime, insurance companies are bailing on tens of thousands of homeowners who have property in high fire-risk areas.
So, what is the FAIR Plan’s budget? The plan, considered a last resort by many because of its high cost and limited coverage, is seeking a 48.8% increase in its dwelling-fire rate, according to an email from Victoria Roach, president of the California FAIR Plan Association. The plan doesn’t have a budget for insurance coverage since wildfire exposure is different each year and in each fire, she told me.
Buyer beware: FAIR Plan, which insures condos, commercial properties and single-family homes, comes with some big caveats.
“FAIR Plan’s stripped-down homeowners’ policy is triple to quadruple the cost of a regular policy,” said Wendy Holt of Rancho Cucamonga-based Holt Insurance.
She said because of those high costs, only 10% to 15% of her clients carry the FAIR Plan. And owners/homebuyers must purchase supplemental companion policies because the FAIR Plan offers limited coverage, said Holt, who has been my insurance broker for more than 30 years. For example, it doesn’t cover theft, flood, earthquake, hail, vandalism or personal liability.
Now, think about this in terms of condominium associations that might benefit from adding the FAIR Plan. What is worse, paying for the FAIR Plan and the companion plan to get cheaper Fannie financing? Or finding a higher cost, non-warrantable condo mortgage without having 100% replacement coverage in the event of a catastrophic event like Champlain Towers experienced? Neither are affordable solutions.
For some context, let’s circle back on what a lack of insurance and Fannie financing looks like. In Laguna Woods, there were 75 active home listings on April 28, 2022, according to Steven Thomas, chief economist of Reports on Housing. There were 88 active listings as of April 27, 2023. The village recorded 18 financed condo sales in April 2022 compared with just four such sales this April, according to Lawyers Title. So that means listings went up 17% year over year but financed sales dropped 82% in the same period. Remember: Fannie pulled the plug on the Laguna Woods 6,102 condos on Jan. 31.
The FAIR Plan is a nonprofit and does not publicly disclose its financial information, but California law requires any rate changes to first be approved by the DOI.
The Department of Insurance and Commissioner Ricardo Lara have not responded to multiple interview requests by this columnist regarding the FAIR Plan’s insurance coverage.
Well beyond the Fannie condo blacklist, an insurance crisis is brewing for those who can’t find fire or gap insurance.
Freddie Mac rate news: The 30-year fixed rate averaged 6.39%, 4 basis points higher than last week. The 15-year fixed rate averaged 5.75%, unchanged from last week.
The Mortgage Bankers Association reported a 5.7% mortgage application decrease 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 $527 less than this week’s payment of $4,538.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: A 30-year FHA at 5.75%, a 15-year conventional at 5.625%, a 30-year conventional at 6.125%, a 15-year conventional high balance at 6.125% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.625% 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 VA fixed rate at 5% with 2 points cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011