Where America Goes for Insurance Rate Information
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As of May 1, 2008, AIG, a major private mortgage insurance company, will no longer underwrite coverage if you own a condominium in an area where property values are declining. For condo owners, this means you could face some serious obstacles in the future if you want to sell or refinance your condo. This new underwriting guidelines is important because it has the potential to both discourage new homeownership and make it nearly impossible for current owners to preserve the value of their homes.
AIG’s decision is novel because it has nothing to do with applicants’ assets or credit scores. Rather, it is about the direction the market is headed in the area where the property is located. If the condominium subdivision is in a declining market area, owners may find it impossible to find insurance coverage if they decide to sell or refinance. Other insurers might continue underwriting such coverage but will probably follow AIG’s lead to some extent by demanding higher down payments for entry-level homebuyers.
In a similar change, Fannie Mae and Freddie Mac have announced more stringent underwriting guidelines for lenders that write loans for condominium buyers. As a result, the loan officer must verify the accuracy of a long list of descriptors about the condo and its surrounding area. The loan officer must look into the subdivision characteristics, association operation budgets, legal documentation of the subdivision, amount of reserves, percentage of late payers, percentage of non-owner occupants, and many other factors before writing the loan. Before the new guidelines, this information was usually supplied in the form of something called a Condo Cert. What is different now is that the loan officer must go to great lengths to verify its accuracy.
These new underwriting guidelines have important implications for both current condo owners and prospective buyers. The changes in insurance underwriting will make it very difficult for condo owners in declining markets to sell or refinance. The additional underwriting guidelines for lenders could make it nearly impossible for lenders to issue condo loans if they do not have the staff needed to accomplish the requirements. Many experts speculate that these new guidelines will have a profound effect on condominium values as a whole. Especially for condo associations in declining markets, budgets, costs, and reserves will need to be carefully revisited if they want to meet the requirements of the new guidelines. Ultimately, these changes could discourage new condo ownership and make it impossible for current condo owners to protect the value of their homes.
