10% reserve threshold

The Question

One of your articles mentioned that federal guidelines called for 10% of the budget to go towards a reserve fund. I am president of a Colorado HOA and am unfamiliar with these guidelines. Could you provide some direction on what they are called and how I might find them?

The Answer

According to FannieMae, one of the government sponsored enterprises (GSE's) that underwrite a significantly high percentage of conventional loans, a lender's review of condominium projects must include a review of the association's budget to ensure that it is "adequate" and that it "provides for the funding of replacement reserves for capital expenditures and deferred maintenance (at least 10 percent of the budget), and provides adequate funding for insurance deductible amounts." This can be found in the most recent updated FannieMae Selling Guide, or more specifically on page 4 of Announcement 07-18 as issued on 11/15/07.

Although the reference to the 10% reserve requirement is for a full project review by lenders, most lender investors will adhere to these guidelines for individual transactions, according to Doug Sullivan of Sulquist Mortgage of Breckenridge. The principal reason is that these lender investors want to ensure that the loan will be saleable in the future ... adhering to FannieMae's guidelines, even those for a full project review, guarantees this.

Each time a property governed by a community association is under a sale agreement, during which a mortgage is required, the lender submits a HOA Certificate to be completed by the HOA, usually its managing agent. This certificate has one or more questions related to the reserves in order to determine adequacy and compliance (at least with FannieMae guidelines). If the reserves are underfunded, this could be a reason to deny the loan. The seller could then have reason to chellenge the HOA on neglecting its fiduciary responsibility to protect, maintain and enhance the property (values). However, if you HOA has less than 10% dedicated to the reserves but has a sound reserve plan to which they are abiding by, any seller(s) should not be too concerned nor jeopardized by this FannieMae requirement.