Tag Archives: master association

But the Master Association Has Reserves

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kenhurst_300pxA few months ago, I received a phone call from a reverse mortgage loan officer regarding an association that was recently Rejected for an FHA Condominium Approval.  He said that he has clients in the community trying to get a reverse mortgage but can’t because it is not approved with FHA.

Another company had submitted the condominium to FHA for approval but once it was Rejected, they didn’t know how to get it approved.  Although there were several reasons for the Rejection, the biggest hurdle was that the condominium did not have its own reserve account.  FHA requires that 10% of the annual common charges be contributed to a reserve account each year.

At first glance, this condominium was not doing so.  However, after a conference call with the loan officer and the property manager, a light appeared at the end of the tunnel.

The condominium shares a campus with another condominium.  The two are part of a Master Association.  The Master Association is responsible for the collection of all common charges in both condominiums.  All common elements and limited common elements are owned by the Master Association; their maintenance and upkeep are the responsibility of the Master.  The two condominiums have few bills of their own.

Neither of the two condominiums maintain their own reserve accounts.  The Master Association maintains reserve accounts and collects money for their funding annually.  Because the condominiums don’t own their common elements, I didn’t believe that the condominium would be required by FHA to have its own reserve account.  Since the Master met FHA’s reserve requirements, the condominium should get approved.

We accepted the challenge and began compiling documents.  They included the budgets, income statements and balance sheets for both condominiums and the Master as well as the legal governing documents for the Master.

After some back-and-forth with FHA and providing detailed explanations of the workings of the Master and the condominiums, we were pleased to provide the condominium with the FHA approval notification today.

Shortly thereafter, I received a voicemail from the loan officer that nearly ruptured my eardrum.  Let’s just say that he wasn’t as optimistic as I was that the approval was forthcoming and his jubilation spilled over in the form of volume on the message.  It may be the best business voicemail of all time.

Top Photo Credit: (c) Can Stock Photo / kenhurst

No Pooled Insurance Without a Master Condo Association

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gstockstudio_2This may be one of those cases where FHA makes internal changes to its guidelines for condominium project approval and doesn’t tell anyone, which sometimes happens.  We who submit condominiums for FHA project approval often don’t learn about such internal changes until we submit a project that gets rejected for a reason that we have NEVER heard of.

We are working with a condominium project that shares insurance policies with a bordering condominium.  Let’s call them Condo1 and Condo2, respectively.  Both condominiums benefit from the pooled policy by paying reduced premiums.  In this case, there is sufficient coverage in the policy to replace all buildings and amenities if catastrophe struck and both communities were destroyed.  The liability coverage and fidelity/employee dishonesty coverages also meet FHA’s guidelines.

Condo1 was rejected by FHA for having a pooled insurance policy and the reviewer asked for the Declaration and By-laws for the Master Association.  These documents don’t exist; they are unaffiliated.

This was news to us because we have worked with several associations that have had pooled insurance policies with other condominiums that did not have a Master Association in place.

Interestingly, Condo1 was approved with FHA just over two years ago AND the reviewer at FHA that rejected Condo1 approved Condo2 about 18 months ago. The same insurance policy has been in place the entire time.    Maybe it was OK then, but it’s not OK now…?

I asked that the reviewer speak to his supervisor about it.  Apparently, my request for a second set of eyes made its way to HUD Headquarters in Washington DC.  I received an email about a week later notifying me that HQ said:

“[Name removed] from Washington informed us we cannot accept Pooled policies from unaffiliated associations. I can only accept a policy with a Master Association that has it covered within their by-laws, otherwise the association must have its own policy.”

I would expect that this information will be conveyed to all of the FHA condo project reviewers in all of the Homeownership Centers if it has not been already.  Typically, when an event like this happens that hits HQ in DC, it is broadcast throughout the HOCs via conference call or training/update.

These two associations must now segregate their policies if they wish to maintain their approvals with FHA.  Or create a Master Association which is highly unlikely.

If you are working with associations that have pooled policies like this and they wish to gain or maintain their approvals with FHA, please contact me if you have any questions.

Top Photo Credit: (c) Can Stock Photo / gstockstudio