An HO-6 policy is the form used for a condominium insurance policy. This condo policy will provide for coverage on the interior walls, interior upgrades, and for personal property held within the dwelling.

How does this apply to mortgage finance? In 24 years of mortgage banking, I have never even heard of HO6 insurance. And that is because when underwriting a condo loan, the banks only cared to see that the dwelling was insured in case of damage. And in a condo, part of condo fees go towards the master umbrella policy, so the unit owner usually does not concern himself with getting dwelling coverage, because the master policy covers the reconstruction of their unit. But now, banks have new HO6 rules. This changed in the middle of 2009, and I have done 30-40 condo loans since then, and am just finding out now!

Fannie Mae now requires that lenders verify that hazard insurance for all condominium projects covers fixtures, equipment, and other personal property inside individual units.  The updated underwriting policy now requires that the borrower obtain a “walls-in” coverage policy (also known as an HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage. The master policy must include replacement of improvements and betterment coverage to cover any improvements that the borrower may have made to the unit. The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit’s appraised value.

So Fannie Mae, in changing this rule, is forcing condo owners to absorb some of the financial/insurance risk. Maybe this is a wise move for condo owners? It may be especially good for condo owners who have done extensive interior renovations, and would never get their unit rebuilt to the level they renovated it to, if they solely relied on the master condo policy. So maybe its good news for the consumer? Maybe its passing the insurance buck to the consumer?

All I know is that I have done all those condo loans I mentioned, since the middle of 2009, and no one brought it up until now! Maybe that is a good thing for all those prior condo loans I did?

The loan I am trying to get approved now is going to get more expensive for the consumer, because I now have to tell him to go out and spend money on an HO6 policy. But in defense of Fannie Mae and the banking industry, the consumer will also be better protected.