What recourse does an individual who owns a condo in a FEMA flood zone (100 year flood area) have to refinance their condo outside of HARP when most of the condo owners in the complex do not have flood insurance? How do you sell a condo in the above situation when no one will finance the buyer?
According to the Federal Emergency Management Authority (FEMA) itself – they’re the agency that administers the Federal Flood Insurance Program — responsibility for securing flood insurance coverage for the condominium or development is typically the responsibility of the boards of directors of associations.
This applies at a minimum to the common elements of the developments.
While FEMA does specify “under their by-laws,” indicating that there’s more than one way to skin a cat, I don’t see any other way the common areas would be covered.
Understand, also, the position of the lender: If they loan on a condominium that is not fully covered by flood insurance, their capital is at risk. Even if the individual condo owner secures coverage, the property remains at risk if neighboring units are not covered, and there is also substantial risk if the common elements of the property are not protected.
So they won’t. Banks usually want to sell their mortgages upstream, to entities like Fannie Mae and Freddie Mac, so they have cash to lend back out. Fannie and Freddie won’t lend on an inadequately insured condo.
And the Federal Deposit Insurance Corporation – the folks with the ability to move in and seize and liquidate banks if they screw up their lending, and who ultimately backstop banks and their ability to meet their obligations – also has its own requirements:
Flood insurance is required for the term of the loan on buildings or mobile homes when all three of the following factors are present:
- The institution makes, increases, extends, or renews any loan(s) (commercial or consumer) secured by improved real estate or a mobile home that is affixed to a permanent foundation (“security property”);
- The property securing the loan is located or will be located in an SFHA as identified by FEMA; and
- The community participates in the NFIP
Institutions are not prohibited from making, increasing, extending, or renewing a conventional loan if the community in which the security property is located has been mapped by FEMA but does not participate in the NFIP.
However, federal flood insurance is not available in these communities. In addition, it should be noted that government guaranteed or insured loans (secured or unsecured) cannot be made if the community has been mapped by FEMA and does not participate in the NFIP.
The upshot is that if federal flood insurance under the NFIP is available in your community, the property has to have it, or the bank cannot finance it using a conforming loan eligible for purchase by Fannie and/or Freddie.
The Importance of Flood Insurance
Wargame the situation through a bit: If Joe insures his condo, but Jane next door doesn’t insure hers, and there’s a flood, and Jane can’t repair the damage on her side of the wall, because she can’t afford to, Joe’s property values will be substantially negatively affected.
Furthermore, suppose Joe and Jane both cover their own units individually, but the board never secures coverage for the common areas. The pool area, weight room, lobby, and administrative office are submerged in a flood.
At best, the board of directors would have to enact a massive assessment to raise money to repair the damage. Many condo owners won’t be able to afford it. The burden would be borne by a few unit owners with the liquidity to come up with the cash – if then – and they’d probably sue the others for failing to pay their assessments!
What would happen to the value of the property in the interim? It would be a disaster.
For this reason, Fannie and Freddie won’t touch a condominium unit unless flood insurance was in place for all units and the common areas. I wouldn’t, either.
Structuring Flood Insurance
Now, this document from FEMA illustrates several different ways to structure flood coverage for multi-family properties:
- The Association takes care of all flood insurance for all units, and assesses owners accordingly to pay premiums.
- Unit owners buy their own flood insurance on their own units covering building and contents.
- Owners buy their own using the Dwelling Form
- Association buys the coverage in the name of the unit owner
- Association buys coverage for units owned by the association.
- A non-resident owner buys contents-only coverage (they cannot buy building coverage).
Any of these can work, depending on the situation. BUT… in order for Freddie Mac or Fannie Mae to consider buying the mortgage – or for the federal guarantees to apply, protecting the lender, your association must maintain a Master Condominium Flood Insurance Policy covering all attached units (excluding units in a separate structure).
Further: The homeowners’ association must obtain a Residential Condominium Building Association Policy or equivalent private flood insurance coverage for each building that is located in an SFHA. The policy must cover all of the common elements and property (including machinery and equipment that are part of the building), as well as each of the individual units in the building.
Individual policies purchased by unit owners won’t cut it with Fannie and Freddie.
If the board has failed to maintain a Master Condo Flood Insurance Policy, and I were on the board, and I had a unit owner who was personally economically damaged by the Board’s failure to ensure flood insurance coverage was in place, I would be making sure my directors and officers’ insurance policies were up to date!
Now, you asked about recourse. You could have the buyer(s) explore nonconforming methods of financing, but I wouldn’t touch it if I were a lender, for the same reason Fannie and Freddie won’t.
You probably don’t have much recourse against individual unit owners. As the Fannie Mae document sourced above indicates, even if every owner in the building they got their own dwelling policies on their own units, that still wouldn’t qualify your unit for a conventional mortgage. They can’t fix the problem. It falls to your board to secure the master condo flood insurance policy.
Any way you slice it, the board of directors is going to have to get that in place.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.