Condo Law in California

Owners in financially unstable associations may find it impossible to sell their units. Because of recent underwriting changes by Fannie Mae, the federally chartered company that buys home mortgages and sells them as securities, lenders are now required to examine an association’s finances before making loans. For loan approval, Fannie Mae requires the following:

• Delinquencies. No more than 15 percent of association’s dues can be more than one month delinquent. [This makes it imperative that boards have written collection policies in place and that they closely follow those policies.]

• Insurance. The operating budget provides adequate funding for insurance deductibles. [Boards need to add a line item to their budgets for insurance deductibles.]

• Reserves. At least 10% of budget is allocated to funding reserves. [This does not mean that reserves are 10% funded; it means that at least 10% of the budget is flowing into reserves each year.]

• Renters. At least 51 percent of the total units in the project must have been conveyed to owner-occupant principal residence or second home purchasers. [Associations should amend their CC&Rs to include reasonable rent restrictions.]

• Investors. No single entity (the same individual, investor group, partnership, or corporation) may own more than 10 percent of the total units in the project. [CC&Rs should be amended to limit the number of units any one person or entity may own.]

• Separate Metering. The individual units should be separately metered. If they are not, the project’s plans should provide for the ready adoption of unit metering. [Many associations have already sub-metered their electrical. If master metered associations have not already done so, they should start budgeting for sub-metering.]

If an association fails to meet the above requirements, the development could be red tagged, i.e., no loans will be made on any units. For more information on these requirements, go to Fannie Mae’s website.