The community's HOA has nearly a $1 billion
insurance gap, by Fannie's new warranty standards.
By JEFF LAZERSON | firstname.lastname@example.org | MortgageGrader.com
Article originally posted in Orange County Register on March 3, 2023.
Without public warning, Fannie Mae unceremoniously pulled the plug on its condo warranty approval for 6,102 condominiums and single-family condos at Laguna Woods Village as of Jan. 31.
Specifically, we’re talking about Third Laguna Hills Mutual, which represents about half of all the homes in the 55-and-over community.
The community, according to its HOA management firm, has a nearly $1 billion insurance deficit, prompting the mortgage giant to pull it from its list of eligible (warrantable) condos. Instead, Third Laguna Hills Mutual was placed on the unwarrantable condo list.
This means no more cheap, conventional financing for buyers or refinancers.
Condominium insurance requirements forever changed for Laguna Woods and every other condo complex after the catastrophic, Surfside condo collapse in South Florida on June 24, 2021. Ninety-eight Surfside occupants died.
The Surfside association was woefully short on insurance coverage. It reportedly had $50 million in insurance but payout estimates were as much as $1 billion, according to the Wall Street Journal.
This means most mortgage lenders will not offer purchase or refinance financing because lenders look to Fannie Mae’s condo eligibility list as a guide, including mortgage giant Freddie Mac.
This is not the first finance shakeup for the village.
Two years ago, United Laguna Woods Mutual (with 6,323 coops), saw its only lender, National Cooperative Bank pull out over Fannie Mae’s insurance requirements, according to Dan Yost, an insurance and risk analyst at Village Management Services. The company is the HOA management firm for both Third Laguna Hills Mutual and United Laguna Woods Mutual.
Third Laguna Hills Mutual is not FHA-approved. So for now, finance options include VA-approved loans for eligible in-service military members and eligible veterans and significantly more expensive non-conforming mortgages.
Buyers not able to pay cash are being tasked with finding non-warrantable condo financing. The translation: Buyers will be putting a minimum of 20% down. More or less, they’ll also be looking at a 2.5% higher interest rate on a 30-year fixed rather than typical Fannie Mae conventional pricing for a well-qualified borrower. Points will vary slightly.
For example: assume a $600,000 sales price and a 25% down payment, leaving a loan amount of $450,000. The 30-year Fannie at 6.25% offers a principal and interest payment of $2,771 with 1.25 points costs.
Now, consider the non-warrantable condo financing at 8.75%. That payment is $3,540 with 1.75 points. That’s $769 smackers more per month. Property taxes, HOA charges and any interior homeowner’s insurance charges won’t differ, regardless of the loan program. Those figures are excluded from this payment comparison.
According to Yost, 67% of Laguna Woods condo buyers in 2022 paid cash and 33% financed their purchases. Some buyers use so-called delayed financing, whereas they pay cash and then pull out up to 75% cash-back after closing.
Lack of access to more affordable mortgage financing is never good for community property values, even if roughly two-thirds of the buyers pay cash.
What does the change mean for Laguna Woods and for buyers?
“This will cause downward (price) trajectory,” said Bob DePew, a broker associate at Laguna Premier Realty, on Feb. 26, the day I was visiting open houses in Laguna Woods Village to learn more. Unprompted, DePew provided every important detail upfront, without any prodding from me.
It’s worth noting two other agents hosting open houses did not freely share information about the Fannie financing shutdown until I pressed them.
“What about the buyers in escrow? Don’t they have a right to know?” I asked.
‘We’re not going to tell them.’ was the answer I got from one agent. A fourth agent I interviewed was unaware of this news.
One open house buyer I stopped named Linda (she declined to provide her last name as she is a public figure) had no idea about the Fannie financing shutdown.
“I’m eliminating this,” she told me. “I’m unwilling to pay (the higher interest rate). I will pay $150,000 to $200,000 more outside the gate with a $300 HOA.”
Third Laguna Hills Mutual has a monthly HOA of roughly $781, according to Eileen Paulin, marketing, and communications manager at Laguna Woods Village. Fees vary slightly in the communities.
It’s worth noting that from Feb. 1, 2022, through Jan. 31, the median condo price in Laguna Hills (adjacent to Laguna Woods Village) was $600,250 on 124 sales. Over the same time, 417 Third Laguna Hills condos sold for a median price of $420,000, according to Steven Thomas, a housing analyst who pens Reports on Housing.
From Jan. 1, through Dec. 31, 2022, 54 condo owners in the village refinanced $23,678,600 worth of mortgages for an average loan amount of $438,493, according to ATTOM Data Solutions.
This is a difficult set of circumstances for all concerned that seems to be nobody’s fault when it comes to legitimately needing but not having enough replacement insurance coverage. The HOA has a $935 million insurance coverage gap, carrying $675 million of insurance while Fannie requires $1.6 billion of cost estimator replacement coverage.
“Capacity is not available (even with) a tower of insurance (carriers) to get full replacement coverage,” Yost said.
Was Surfside a catastrophic isolated incident? Maybe not.
The Glass fire wiped out Calistoga Ranch, a high-end resort in the California wine country, including 48 guest houses. Homeowners are suing, claiming inadequate insurance for the fire damage
Yost, citing information he received third-hand, said the community hired a consultant to confer with Fannie Mae regarding the insurance gap. Did that meeting actually prompt the mortgage agency to yank its privileges? Perhaps, but nobody will say on the record.
What about the obligation of the Third Laguna Hills Mutual to be transparent to the homeowners about potentially losing access to Fannie Mae financing? How many of those 417 purchasers in say the past year would have walked away or given a low-ball offer had they known what was potentially coming? How many more than the 54 homeowners would have refinanced before Fannie cut them off?
For existing mortgage holders in the village with Fannie Mae loans, nothing changes. But be mindful that HOA common-area insurance includes individual structure insurance down to the studs. In some circumstances, condo owners may be required to separately purchase such walls-in insurance if the HOA doesn’t cover the interior insurance.
Interior insurance means interior wall damage, for example. In my experience, only very old properties with old CC&Rs might have language covering the walls-in insurance. If the owner has to pay for the walls-in coverage, it might be $50-$75 bill monthly in addition to the HOA fee.
“In my opinion, the HOA has a fiduciary duty to alert condo owners to the loss of funding options and the insurance gap,” said attorney Mike Hensley. “The insurance gap disparity puts into question the reliability of any consultant’s advice to the HOA, which could open up additional liability. There are many questions here.”
How can Fannie Mae do better? There is some disappointing arrogance in the bureaucracy of Fannie. For example, it treats its condo approval list like a trade secret. There is no public access to the approved list. Even FHA and VA provide public access to their lists.
What about some common sense and common courtesy such as a caution flag? Why can’t Fannie publicly notify HOA stakeholders that are on the edge of getting yanked from the approved condo list?
If board members and property owners receive a heads-up before they get cut off, they might very well rally together to address Fannie’s issue. After all, we’re only talking about an important wealth-building asset many Americans possess.
The Federal Housing Finance Agency (Fannie’s regulator and conservator) declined to comment on a multitude of questions.
Freddie Mac rate news: The 30-year fixed rate averaged 6.65%, 15 basis points higher than last week. The 15-year fixed rate averaged 5.89%, 13 basis points higher than 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 $1,295 less than this week’s payment of $4,662.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6%, a 15-year conventional at 5.75%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 6.75% ($726,201 to $1,089,300), a 30-year high balance conventional at 6.875% and a jumbo 30-year fixed at 6.875%.
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 5.625% with 2 points cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or email@example.com. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011