www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 March 24,1986 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 86-8 TO: ALL HUD APPROVED MORTGAGEES SUBJECT: Insurance Requirements - Multifamily Housing Projects Insurance premiums, including those for fire and hazard insurance required by HUD, are increasing at an alarming rate due to changes in the economics of the insurance industry. These changes are resulting in higher than normal premium increases and have created a problem in securing insurance for Multifamily Housing Projects insured under all Sections of the National Housing Act, including co-insured projects. The rate increases are so high that, in several instances, insurance cannot be purchased even through the FAIR plans administered by the States. HUD Regulations (24 CFR 207.10) require that the mortgage include a covenant binding the mortgagor to carry a standard insurance policy or policies against fire and other hazards in an amount that meets the coinsurance requirements of the insurer and is at least equal to 80 percent of the actual cash value of the insurable improvements and equipment. These insurance requirements apply as long as the mortgage is insured by HUD, and regardless of the unpaid principal balance of the mortgage. Mortgagee Letter 83-24 , dated October 25, 1983, sets forth the method to determine the correct amount of insurance. That letter (and Section 207.260 of the Regulations) also requires all insured mortgagees to pay insurance premiums to keep such policies in force and bill project owners for premiums due if mortgagors refuse to pay higher premiums for increases in insurance coverage. To address the problem cited above and ensure that mortgagees continue to meet HUD's requirements for fire and hazard insurance, we have advised our field offices to approve rent increases sufficient to cover the increased cost of insurance premiums. Additionally, the Field Offices were directed to increase the Reserve Fund for Replacements deposits when lenders agree to increase deductibles. When Reserve Fund for Replacements deposits are increased, Regulatory Agreements will be amended to reflect the change. However, there may be some instances where other measures need to be taken by the mortgagee. These include (1) making advances to pay premiums until rents are increased sufficiently, and billing the owner for the advances; (2) establishing reasonable deductible amounts; (3) setting aside a portion of the Reserve Fund for Replacements, or transferring a portion of the residual receipts, if any, to the Reserve Fund for Replacements account as a "reserve" for deductibles; and (4) insuring quick response to the Field Office's authorization to use Reserve Funds for Replacement Funds _____________________________________________________________________ - 2 - to pay premiums where the project owners and HUD have amended Regulatory Agreements to allow HUD to authorize mortgagees to automatically apply sums in the Reserve Fund for Replacements Account to payments due. If a part of the Reserve Fund for Replacements Account is set aside in a "reserve" for deductibles, the funds should be held in cash or should be invested only in a manner that it can be converted to cash with no penalty to project owners and in accordance with requirements otherwise applicable to the investment of Reserve for Replacements Funds. HUD Regulations (24 CFR 207.260 (d)(3)) require all insured mortgagees to notify the commissioner within 30 days of the cancellation of the insurance or of the refusal of the insurance company to renew the insurance. That Regulation also requires the mortgagee to notify HUD that diligent efforts to obtain coverage against fire and other hazards at reasonably competitive rates were unsuccessful and that efforts will be continued to obtain such coverage at competitive rates. Failure to notify the Commissioner may result in a reduction of a mortgage insurance claim should the property be damaged at the time of assignment. The notification letter and a copy of the notice of denial or refusal to insure from the insurance company or the State Insurance Commissioner should be sent to the Director, Office of Multifamily Housing Management, 451 7th Street, SW, Washington, DC 20410-8000. The Office of Multifamily Housing Management will acknowledge receipt of this letter and will notify the applicable Field Office. The notification must be accompanied by Notices of Denial or Refusal to Insure issued by the insurance companies contacted. If a claim for mortgage insurance benefits is made while the project is uninsured, a copy of this acknowledged notice must submitted with the election to assign. If insurance coverage is subsequently obtained, notice shall be given to HUD at the above address. Experience has shown that increases in insurance rates are cyclical and that eventually a more competitive market will return. In the meantime, we urge your cooperation in dealing with the present situation, especially by notifying project owners when you find potentially hazardous situations, such as: (a) Stair or elevator blockages. (b) Inoperative or blocked entrance or exit doors. (c) Fire extinguishers in inoperable condition or missing. (d) Poorly maintained heating or cooling systems. (e) Inadequate electrical systems. (f) Flammable liquids stored on site or near sources of combustion. (g) Improperly marked electrical or water systems. (h) Wet floors near electrical boxes or connections. (i) Dirty laundry rooms. (j) Improper insulation of water/steam pipes. (k) Lack of sprinkler systems, standpipes, or fireproofing in boiler rooms or near other sources of heat. _____________________________________________________________________ -3- For any technical questions, contact James J. Tahash at (202-426-3944). Sincerely yours, Silvio J. DeBartolomeis Acting General Deputy Assistant Secretary for Housing-Deputy Federal Housing Commissioner _____________________________________________________________________