This is part three in a series on HOA reserve funds.

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, which is still available at www.dre.ca.gov.

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.

Fannie Mae is one of the main purchasers of residential mortgages from lenders. The federal mortgage backer 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, who said her firm has consulted over the past 15 years with more than 10,000 HOAs seeking approval for FHA and VA certifications.

In discussing reserves, Stewart first said 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,” she said. “Buyers are not receiving these important disclosures until almost the end of the process, not when they make the offer.”

Stewart said 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 Fannie Mae eligibility. She also said that the Federal Housing Administration, in addition to the 10% funding requirement, also requires “adequate” reserve funding. Although “adequate” isn’t specifically defined, she said 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 Fannie Mae’s so-called “blacklist” – a list of HOAs that are specifically banned from its condominium loans. The list currently includes more than 5,000 HOAs nationwide of which 500 are in Southern California. 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 that the HOA has been blacklisted.

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. Stewart said that problem seems to be calming, as HOAs have learned how to make those disclosures without making promises to lenders.

She also said that, in addition to inadequately funding reserve accounts, other common reasons for blacklisting are unfunded critical repairs, pending significant lawsuits by or against the HOA, and the number one 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.

Kelly G. Richardson CCAL is a member of the College of Community Association Lawyers and Partner of Richardson Ober LLP, a California law firm known for community association advice. Send questions to Kelly@roattorneys.com.