At a time of devastating property damage due to storms and hurricanes, another menace has emerged from all the wild weather happening nationwide.

It’s a financial menace that prevents lenders from lending, buyers from borrowing, and owners of attached homes from selling their units in certain Homeowners Associations.

I’m calling it UCHID—the Unintended Consequence of Higher Insurance Deductibles.

Some HOA’s seem to be suddenly non-warrantable—essentially unfinanceable—with conventional loans.  Prospective buyers there can’t get financing backed by Fannie Mae and Freddie MAC, the big federal loan guaranteeing agencies.

I can think of no surer path to destruction of property values.  It is a slow-motion financial hurricane.

That’s on tap for many HOA’s, if their issues aren’t resolved.  A fix could happen at the individual associations or at the federal level, at Fannie and Freddie.  (Be assured the latter would take forever.)

Here’s some background on this “financial disaster” from local lender Darrell Schwandt.

Bowling Green Home Owners Inc. is an HOA encompassing 114 condos in southeast Denver. In the spring of this year, its directors responded to rapidly rising insurance costs.

They switched insurers and in the process, chose a 10 percent deductible for wind and hail claims. It was 5 percent with the previous carrier.  The move saved the association $80,000 per year.

The new policy took effect on May 26, 2024.  Its annual premium is now $153,062.

A 1BR condo was listed for sale on April 16 by Andrew Darlington, a broker with Your Castle Real Estate. It went under contract in May. The contract terminated on June 24 when the buyer’s financing failed. The lender said the HOA’s 10 percent deductible was unacceptable.

The borrower in that case was a first-time homebuyer receiving downpayment assistance and putting just $1,000 down. So not necessarily the strongest of borrowers in a lender’s eyes.

But will UCHID affect all conventional buyers, even with larger down payments?

I’ve asked two good mortgage brokers including Schwandt, in the video above. Both say (somewhat equivocally) that it seems so. The 5 percent max is a guideline affecting all conventional lenders in Colorado. The allowable limit has been raised in other states including Florida.

Since Bowling Green’s new insurance took effect, two buyers have closed in the community. Both used FHA financing from the Federal Housing Authority. That’s a route different and distinct from conventional Fannie Mae financing. But even in the best case, it is not for everyone.

FHA allows a lower down payment of 3.5 percent, and it’s available to borrowers with lower credit scores. But it requires private mortgage insurance (PMI), a monthly premium tacked onto the mortgage payment.

Bowling Green is not on FHA’s list of financing-approved HOA’s,  (See the list at https://entp.hud.gov/idapp/html/condlook.cfm.) Its status has been “rejected” since 2018. The two FHA closings since May both had single-unit “spot” approval—a time-consuming and uncertain alternative when FHA aproval is absent. Many mortgage and real estate brokers won’t touch it.  Many say never again.

If you have two good eyes and lose the sight of one, it’s not the end of the world. You can still see and walk around and function. (I’ve experienced it.)  But if you have only one eye and lose it, it’s a catastrophe. 

That’s Bowling Green.  Until recently it had at least one viable financing option: conventional.  Now it has none.
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I have a personal stake in the Bowling Green community. My own listing hit the market on April 11. It was withdrawn six months later on October 12.  It’s a beautifully renovated 3BR condo originally priced at $315,000.

I am not only the listor.  I am 50 percent owner of the property with a partner.  We bought it as a fiip investment and did extensive renovation work.

Our listing went under contract once, in June. The inspection and appraisal went fine. Then the buyers abruptly terminated.
The agent offered no real explanation except to cite “complex financials” in an email. I did not press for details, thinking another deal would come along soon.

But the listing then languished. Now I plan to buy out my partner and offer the property as a rental.
Does UCHID deter prospective buyers from even viewing listed properties?  Hard to say. Early-stage home shoppers generally aren’t aware of exotic financing obstacles. Their brokers should be, but many aren’t.

When comparable sales dry up, prices inevitably fall.  The drought could stem from unclosed contracts or a simple lack of good listings, when financing options go away.

To properly serve current homeowners, HOA’s must address their warrantability issues with all due haste. Without loans, there are few owner-occupant buyers. Just cash buyers bringing lowball offers.

Which may make institutional buyers happy, as they start gobbling up nice rentable properties that the owners can’t sell otherwise, at Bowling Green and other distressed HOA’s.

Who wants to start a fund?

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