Monday, December 14, 2009

Ho - 6 and Condominium Policy considerations for Homeowners in Covenant Protected Communities

As an individual condominium or townhome owner residing within a covenant protected community there are specific questions a homeowner needs to consider when purchasing a policy for their individual condominium or townhome. New homeowners are advised to carefully review the homeowner association's Declarations and Covenants, as well as the Rules and Regulations prior to purchasing their coverage. Here are just a few of the questions one should be asking when considering purchasing an HO-6 or Condominium policy.

Not all Homeowner Association blanket Commercial General Liability insurance policies are alike. Unlike cookie cutter policies, the Commercial General Liability Policy for one homeowner association may be significantly different than that of an adjoining community association next door. Contrary to popular belief, the Blanket Commercial General Liability Policies are often designed by the underwriting company keeping the specifics outlined in the associations' Declarations and Covenants, as well as the Rules and Regulations. Some association Declarations are straight forward in that they cover anything on the outside and nothing on the inside. Some associations have the associations' responsibilities end at the door. This includes such items as sewer lines, water lines, electrical, etc. In addition, they often exclude coverage for such items as exterior doors and windows.

Other associations, such as condominium associations, may provide limited coverage for the interiors of the association. Under a "Paint In" policy, the associations' insurance may cover such items as interior plumbing, electrical wiring, structural framework, etc. While others have a "studs in" form of coverage. Under a "Studs In" policy the associations' policy may provide coverage for damages to drywall. The terms and types vary from one risk underwriter to another. Generally, most companies carry what is known as an "HO-6" or "Condominium" policy. These types of policies usually provide limited liability and contents coverage. The liability coverage is often set to $300,000.00 or above. Policies that provide for "Contents Coverage" are often based upon the value of an individuals personal belongings. Things one needs to keep in mind when purchasing an HO-6 or Condominium Policy are as follows:

1) What type of coverage for personal contents does this company provide?

2) What method is used in determining the value of my personal belongings should a loss occur?

3) Does this policy provide financial assistance for lodging should I be required to vacate the premises as the result of a loss?

4) Does the policy have an inflation component for increased costs associated with replacement?

5) What level of liability coverage is provided in the basic policy and can I purchase additional levels of coverage?

6) What levels of medical coverage does the policy provide? Can I purchase additional levels of coverage?

7) What are the various deductible levels and can they be modified?

These are just a few of the basic questions a new homeowner purchasing a townhome or condominium within a covenant protected community should consider. Additionally, a new owner may want to check and see if the underwriting company provides "Loss Assessment" coverage, the levels of such coverage, and whether or not the levels can be modified and/or increased.

LOSS ASSESSMENT - What is "Loss Assessment Coverage? Loss assessment coverage is coverage that kicks in whenever the association requires the enactment of a Special Assessment due to a loss. For example. The Homeowner Association suffers a loss to its roofs as a result of a violent hail storm. Suppose the cost associated with replacing the roofs requires a 2 or 3 percent wind and hail deductible. If the association does not have sufficient funds in its reserves to cover the loss, the difference is generally passed on to the homeowners.

Many HO-6 or Condominium policies provide a basic level of "Loss Assessment" coverage. This level is generally $1,000.00. Several companies, however, have recently increased their basic levels so that the minimum coverage is $10,000.00 with a maximum of $50,000.00. Very often, the companies that have increased their Loss Assessment levels are those companies that have begun utilizing a 2-3 percent wind/hail deductible. Under these policies, a homeowner could easily expect to be hit hard with additional roofing replacement costs associated with a Special Assessment. Therefore, it makes sense, for a homeowner to consider spending the additional funds for the added coverage. Generally, the costs of such additional coverage can range from as little as $8.00 per year for $10,000.00 of additional coverage to $18.00 for $50,000.00. You will have to check with your insurance agent to obtain an exact quote.

LIABILITY - Additional liability coverage should be considered. Today, most people seeking a law suit seem to be fixated with the $1 million price range. Therefore, check with your agent to see what level of liability coverage is provided and whether or not you can purchase additional levels of coverage.

MEDICAL COVERAGE - Another item to consider is the level of medical coverage that is provided with your policy. Most ofetn, these policies only provide $5,00.00 of coverage. If you or a guest becomes injured and requires hospitalization and/or medical treatment are you adequately covered?

SEWER BACKUP - Does your policy provide for sewer backup? Many homeowner association policies only carry a minimal level of coverage for damages related to backed up or broken sewer lines. These levels usually are in the $5,000.00 to $10,000.00 price ranges. Check with your agent to see if your HO-6 or Condominium policy provides such coverage and at what levels. Also check to see if you can purchase additional levels of coverage.

BETTERMENTS - Will your HO-6 or Condominium policy provide for inflationary upgrades or betterment replacement? What are betterments? These are improvements that were made to your property during its lifespan. For example, let us assume that you purchased a townhome with standard formica counter tops. You later upgrade your kitchen with granite counter tops. A fire hits your kitchen and you have to have it replaced. Will your company replace the kitchen with the formica (which is what was there when it was built) or will it replace it with the granite? Having additional "Betterments" or "Improvements" coverage will insure that you have the counter tops replaced with what was there at the time of the loss.

FLOOD - Is your property located within a FEMA (Federal Emergency Management Administration) recognized flood plain? If so, can you purchase coverage from your private insurer or are you required to seek coverage from FEMA. Be advised, most private companies and/or FEMA will not issue policies to those private residential communities that are not situated within a FEMA recognized flood zone. However, that may be a question one might desire to ask as part of the purchasing and seller disclosure process. After all, it may be a deal breaker if it is. The flood coverage price tag associated with the property may make it cost prohibitive. Especially if you the owner are required to make improvements, provide a minimum level of maintenance, or are hit with an extremely high deductible.

Finally, remember that not all blanket coverage policies for homeowner associations are alike. These policies can change from year-to-year. Indeed, most homeowner association Declarations and Covenants require the Commercial General Liability Policy to be reviewed and placed out to bid on an annual basis. As such, you may want to review the associations' policy yourself to insure that should a subrogation issue arise you are not left under insured. When in doubt it always pays to ask your agent. In addition, you may want to have your agent communicate these questions and coordinate coverage with the homeowner associations' insuring agent.
Author: David C. Stiver MA
Team Strategy Inc.© 2009
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Wednesday, November 25, 2009

Congress and Department of Education miss Boat on Student Loans

In the fall of 2008, the federal government and Congress enacted a new program that would promise relief for millions of college students across America.  Starting July 1, 2009 students with federal student loans could ask that their monthly payments on the loans be limited to 15 percent of their income.  Others, who are unemployed or underemployed could apply for steeper reductions under the Income-Based Repayment (IBR) program. 

Under either scenario, neither program actually addresses the real issue.  For most students, interest rates are substantially lower than when they completed their education.  However, under current rules, students receiving federally backed student loans may only consolidate their loans one time during the entire lifetime of the loan.  Therefore, if rates were 10 or 12 percent and a student consolidates their loans to 8.25 percent it may seem like a good deal.  Not if rates are currently 3 or 4 percent and you are still paying 8.25%!

Over the past year, student loan defaults, according to the Department of Education, rose from 5.2% the previous year to 6.7%. While these repayment programs seem reasonable, they do not address the heart of the problem. Merely delaying or deferring the payments only extends the loan repayment period. This, in turn, allows the banks and other financial institutions to benefit from a no-lose scenario. If the student defaults, the feds pay the loans. If the student opts for a deferred payment program, the banks receive greater interest over the long term.

Under these band-aid programs, students,will in the long-run end up owing and paying more. If a person pays higher principal payments toward a standard mortgage over a 15 year period, they will pay the home off sooner and owe less interest. Sure the payments may be higher, but they own the home sooner. If, on the other hand, a person pays the minimum principal and interest payments or seeks a reduced repayment over a 50 year period they will have paid far more for their home.  If students were able to refinance to a lower rate there is a greater chance of success and increased payments overall.

Ironically, unlike most federal loan programs, the Stafford, Perkins, or GRAD Plus loan program interest rates are not determined by any free-market fluctuations.  Rather, Congress is responsible for setting the loan rates.  Those 535 people in Washington D.C. who for some reason cannot figure out why the student loan default rate continues to skyrocket.  Imagine that!  Unlike other federally backed/government insured loan programs, such as VA, FHA, etc., students who have already consolidated are locked in to higher prevailing interest rates. 

Instead of creating a climate that encourages repayment, Congress in its infinite wisdom allows the rates to remain and instead bars the indebtedness from being discharged in bankruptcy.  Go figure! Then Congress increases the minimum standard deduction on one's income taxes causing fewer people to benefit from the student loan interest deduction altogether.  Hey folks, how about a lower rate!

Changing the current system would result in the following: 1) higher rate of repayment, 2) fewer defaults,  3) a new market for loan refinancing (similar to mortgage loans) opening up, and 4) reduction in the total loan value that the federal government would have to insure.

Its time the federal government addresses the mechanics of the student loan programs.  Failure to do so will only mean higher taxes for all of us as more and more students merely walk away from their financial obligations.  Seems ironic, a person is more than welcome to renegotiate their mortgage loans but not their federally backed student loans.

Tuesday, November 24, 2009

Team Strategy Inc.: FHA Guidelines Problematic for Homeowner Associations

Team Strategy Inc.: FHA Guidelines Problematic for Homeowner Associations

FHA Guidelines Problematic for Homeowner Associations

On November 6, 2009, the Federal Housing Administration (FHA) issued new guidelines relating to condominium and homeowner associations.  The two documents: HUD Mortgagee Letters 2009-46A and 2009-46B set in place new guidelines relating to FHA mortgage insurance requirements.  Set to begin effective February 1, 2010, these requirements present particular problems for homeowner associations struggling to survive in todays recessionary economic climate.

With national unemployment at 10.2 percent, and higher in several metropolitan areas of the United States, prime loan foreclosures eclipsing (in real dollars) new and existing home sales many homeowner associations Accounts Receivables/Aging Detail Reports are beginning to look like a Who's Who list of late payers within the neighborhood.  Under the newly adopted proposals, it will be difficult for homebuyers to participate in the FHA mortgage insurance program if total number of individual units in arrears exceeds 15 percent.  Homes within a community association of approximately 200 units would not be eligible to participate of a mere 30 units were in arrears or delinquent at any given time - regardless of the number of days (30, 60, 90, or greater).

With foreclosures and individual bankruptcies skyrocketing within the homeowner association communities, many HOA's will be left with no alternative but to discharge (write-off) ever increasing amounts of delinquencies.  Otherwise, how is the association supposed to address the time lags associated with foreclosures and bankruptcy filings?  One way is to merely not impose interest penalties and late fees associated with these accounts.  The other would be to discharge any late assessments on a regular basis.  Thus, the HOA's are caught in a catch 22 scenario.  If they don't impose the interest penalties and late fees, they are in violation of the Declarations and Covenants.  If they assess these fees, they will most likely not see the funds at the end of the day anyway.

In addition, the rising Accounts Receivables on the Association Balance Sheet will be problematic as these associations will find it difficult to market vacant properties within the Association.  As units sit idle, the ability to find qualified buyers will decrease as a result.  What then is the answer?  The FHA must put in place specific exceptions relating to vacant properties already in foreclosure or bankrupcty proceedings.  Associations should not be penalized by having units excluded from the program for merely following Association guidelines.  Already, homeowner associations faced with declining monthly assessment revenues  are finding it difficult to provide even the most routine maintenance services.  Currently, homeowner associations in several states may only collect those legal fees, late fees, and interest penalties enforced within the six-month period prior to the foreclosure.  With individuals seeking bankruptcy protection for any reamining assessments, late fees, legal fees, and interest penalties in record numbers - the implementation of this requirement by the FHA become quite problematic.