Reserve Disclosures; the Lending “Blacklist”

Kelly G. Richardson, Esq. CCAL, HOA Homefront Column 

[Part 3 of a series]

Despite great efforts to lessen the problem, too many HOAs still have inadequate reserve fund savings. Civil Code Sections 5300(b)(2-7) and 5570 require detailed disclosures regarding reserves. The problem is so serious that the Department of Real Estate in September 2012 issued a “Consumer Warning: Underfunded Homeowners Associations” bulletin- still available on the www.dre.ca.gov  website.

Homebuyers not reviewing the HOA reserve disclosures could be misled by their appraisal report. Real estate appraisers are not required to check the state of the HOA’s reserves, meaning that the home’s appraised “market value” may not be an accurate reflection of its true economic value.

Another powerful force is beginning to exert pressure on HOA homebuyers and therefore indirectly HOAs – the lending industry.

The Federal National Mortgage Association, aka “FNMA” or “FannieMae,” is one of the main purchasers of residential mortgages from lenders. FNMA has adopted “condominium project approval requirements,” and will not accept loans from ineligible condominium HOAs.

I contacted Natalie Stewart, President of FHA Review, a nationwide business based in California. Ms. Stewart said her firm has consulted over the past 15 years to over 10,000 HOAs seeking approval for FHA and VA Certification.

In discussing reserves Ms. Stewart first commented that the current HOA reserve fund disclosures are usually not helpful to buyers, since “clients don’t get them until they’ve already signed purchase agreements. The big problem is transparency – Buyers are not receiving these important disclosures until almost the end of the process, not when they make the offer.”

Ms. Stewart said that the failure to allocate sufficient funds in the reserve savings account (10% minimum of the total budget) is a common reason for HOAs to fall short of FNMA eligibility. She said that the FHA, in addition to the 10% funding requirement also requires “adequate” reserve funding. Although “adequate” isn’t specifically defined, she said that the FHA among other things wants to confirm that reserves are sufficient to cover the HOA’s insurance deductibles.

A growing problem for California HOAs is FNMA’s “blacklist” – a list of HOAs that are specifically disapproved for condominium loans. The list currently includes over 5,000 HOAs nationwide and 500 are in Southern California. Ms. Stewart says only the HOA’s manager or a board member can check to see if their HOA is blacklisted. The only other way to find out is if a homebuyer applies for a loan and they learn from their lender of the HOA’s blacklisted status.

Lenders have since 2021 tried to force HOAs to make significant statements about the known health of their buildings, and managers have been afraid of taking on liability through such reports. Ms. Stewart said that problem seems to be calming down, as HOAs have learned how to make those disclosures without making promises to lenders.

Ms. Stewart said that, in addition to inadequately funding reserve accounts, other common reasons for blacklisting are unfunded critical repairs, pending significant lawsuits by the HOA or against the HOA, and the #1 cause - not having full replacement insurance coverage of the condominium building.

If the legislature cannot force it, the DRE’s warning goes unheeded, and real estate agents are unable to focus clients on the importance of reserves, perhaps the lending industry will force HOAs to be more attentive to their reserves.