Understanding the New Fannie Mae Insurance Requirements for Condos and Coops

Insurance requirements for condos and coops have recently undergone significant changes, with Fannie Mae introducing a new level of detail that requires confirmation of certain perils that are not always delineated in a master insurance policy. Lenders, underwriters, condo associations and coop boards being aware of this change is crucial.  This article offers a comprehensive guide to the updated insurance requirements, how they affect the lending process, and why aligning with them is essential.

Fannie Mae’s recent decision adds an unprecedented level of detail to the master insurance requirements, catching many off-guard.

When did Fannie Mae change the insurance requirements?

Fannie Mae unveiled new insurance requirements in December 2022, requiring explicit confirmation of particular perils that weren’t always specified in a traditional master insurance policy.

What are the new insurance requirements for condos and coops?

The changes by Fannie Mae indicate that insurance must cover these 16 perils explicitly:

  1. Fire
  2. Lightning
  3. Explosions
  4. Windstorms, including specific storms named by the U.S. National Weather Service or NOAA
  5. Hail
  6. Smoke
  7. Aircraft
  8. Vehicles
  9. Riot or civil commotion
  10. Vandalism
  11. Sprinkler leakage
  12. Sinkhole collapse
  13. Volcanic eruption
  14. Falling objects
  15. Weight of snow, ice, or sleet
  16. Water damage

If any of the above perils are excluded or there are limits to the coverage of any of these perils, the condo association or coop corporation board must obtain an acceptable stand-alone property insurance policy which provides adequate coverage for the limited or excluded peril.  The policy must provide for claims to be settled on a replacement cost basis as an actual case value basis is not acceptable.  See requirements here: B7-3-03, Master Property Insurance Requirements for Project Developments (12/14/2022)

How do the new Fannie Mae requirements affect the term “special form”?

The term “special form,” previously considered the most inclusive form of coverage does not, in and of itself, satisfy Fannie Mae’s requirements as it is not specific enough to ensure that the listed perils are included.  This poses a challenge for insurers that might not be aware of this, leaving lenders exposed to having a loan returned by Fannie Mae that has not addressed this new insurance requirement.

What should lenders do to protect themselves?

Lenders must make sure to specifically request that the perils listed are covered and make insurers aware that “special form” in and of itself, is not enough to satisfy Fannie Mae’s master insurance requirements.

What else should we know about this new requirement?

Fannie Mae has also stipulated rules regarding deductibles, co-insurance, renovation loans, energy-related improvement loans, and various coverage amounts. These can be found in B7-3-03, Master Property Insurance Requirements for Project Developments (12/14/2022).

How can I find out more about these new insurance requirements?

Understanding and navigating the new insurance requirements as well as other aspects of condo and coop project risk analysis and review can be complex.  Project Risk Evaluation Partners (PREP) provides comprehensive condominium and cooperative project review services at virtually no cost to our clients.   Established in 2019, PREP began with a single client and has since grown exponentially to serve lenders across the country on condominium and cooperative projects, nationwide.  PREP’s accurate, timely, and comprehensive project risk analysis is an essential partner for lenders in the condominium and cooperative market. 

To ensure your condo and coop loans meet secondary market eligibility guidelines, contact PREP today.

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