August 2009 � NEW ENGLAND CONDOMINIUM � 29

By Greg Olear

With the economy in the throes of the worst financial crisis in decades, it’sno wonder that the world’s second oldest profession – thievery – is onthe rise. The nefarious Bernie Madoff and others of his ilk have high-

lighted the vulnerabilities of all businesses to criminal activities, even ones that havebeen, historically, safe – including condominiums.

28 � NEW ENGLAND CONDOMINIUM � August 2009

Fidelity Insuranceis Now Mandated

For In-House Theft

Missing Money

for a loan to be considered “conform-ing” by Fannie Mae. Previously, onlynew HOAs were required to have thecoverage.

Conforming LoansWhat is a conforming loan and

how does Fannie Mae affect NewEngland condominiums? Here’s howFannie Mae operates at a local level:Let’s say Denise wants to buy a

condo for $400,000. After carefullyconsidering her financial qualifications,the Bank of Small Town New England

As a result of the subprime crisis, theFederal National Mortgage Association,or Fannie Mae, instituted a series ofreforms earlier this year intended toprevent further defaults on housingloans.One of these requirements involves

a new insurance mandate that directlyimpacts a condominium buyer’s abilityto secure loans. As of March 1, 2009,all condominiums (both new andexisting) with 20 or more units musthave what’s called fidelity insurance –basically, insurance against thieves –

August 2009 � NEW ENGLAND CONDOMINIUM � 31

(or cooperative corporation) musthave blanket fidelity insurance cover-age for anyone who either handles oris responsible for funds that it holdsor administers, whether or not thatindividual receives compensation forservices,” according to Fannie Mae.Depending on the size and complexityof the HOA, that could include thetreasurer, the rest of the board, andthe accountant.“My understanding is, Fannie Mae

is now requiring that associationsmaintain fidelity insurance,” says JoelMeskin, vice president of communityassociations insurance products withthe Ohio-based McGowan Insurance.Fidelity insurance usually protects

from criminal activity by employees –in-house theft. Because many of thepeople who handle money for an HOAare volunteers, the wording of thecoverages in those policies changes.“We’ve had to expand the definition

of ‘employee’ to include non-compen-sated employees,” Meskin says.Property managers are singled out

in the new Fannie Mae requirements:“A management agent that handlesfunds for the owners' association (orcooperative corporation) should becovered by its own fidelity insurancepolicy, which must provide the samecoverage required of the owners' asso-ciation (or cooperative corporation),”according to Fannie Mae.Crime coverage differs from liability

coverage in that there is a clear cap onhow much insurance you should have.“Crime coverage is a first-party cover-age,” Meskin says. “You only insurewhat you have. You don’t have to worryabout a jury awarding $2 million indamages, like on slip-and-fall.”The formula for determining the

size of the policy is pretty cut-and-dried.

30 � NEW ENGLAND CONDOMINIUM � August 2009

decides to grant her the mortgage.Now, the bank has a choice. It caneither keep that mortgage in house –and with it, the chance that Denisemight one day default – or they cando one of two possible transactionswith Fannie Mae.The bank can exchange Denise’s

mortgage for either the cash value, orfor a security backed by her mortgagethat guarantees that Fannie Mae willmake the mortgage payment everymonth, on time, in full. The secondoption costs a bit more, but it’s a matterof risk assessment. Who’s more likelyto default on the loan in the next 30years, Denise or a monolithic entityimplicitly backed by the U.S. Treasury?Loans that follow the Fannie Mae

guidelines are known as “conforming”loans, with the opposite being “non-conforming.” Meeting the qualificationsbrings a host of benefits, includinglower rates, and banks are leery ofmaking non-conforming loans if theydon’t have to. So it’s in the interestof the homeowner association (HOA)to play ball with Fannie Mae’s fidelityinsurance requirement – or manyloans could be torpedoed, limitingpotential sales and adversely affectingresale values.

Add-On CoverageThe required fidelity insurance, in

short, protects an HOA from in-housethieves.“It’s part of the crime coverages,”

explains Les Stacy, commercial linesmanager for Skelly Insurance in Boston.“It covers embezzlement or theft ofmonies of some kind.”Usually, fidelity insurance is an

add-on to Director’s and Officer’s(D & O) insurance. But now, FannieMae is requiring it for all homeownerassociations. “The owners' association

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“Take a pencil, total up the amountof all your accounts, all the moneyyou have in the bank, and add threemonths of operating funds,” Meskinsays. “That’s the amount of limits youneed to have.”And then there is the additional

Fannie Mae requirement. If the fidelitycoverage has a deductible of, say, $1,000,the HOA must keep that $1,000 inthe bank, with a budget line, in theevent that a claim is filed.But say your HOA has a fire, and

winds up with a million dollars in thebank from the insurance settlement.The treasurer, who is retirement age,might not have risked going to jail for$30,000. But seven figures mayprove too tempting.“He might think, ‘A million dollars

could get me a couple of years in theCaymans,’” Meskin says. In that case,if the HOA did not review the limits,it would only recover the insuranceon the limit, not the amount stolen.

Most TheftsNot ReportedOne case, in suburban Maryland,

amounted to a $2.4 million settlement.In another high-profile case, in Ohio,a management company abscondedwith funds from 50 clients – some$3.4 million in all.Most of the time, though, fidelity

cases are not reported and the detailsare not made public.“In normal cases, in the condo

context, if it’s not a property manag-er, it’s a case of opportunity,” Meskinsays. “’I’m the treasurer, I’ll borrowsome money, I’ll pay it back beforeanyone notices, no harm no foul.’ Ofcourse he doesn’t pay it back, anddown the line he gets caught. Theseare not professional criminals, so theywork out a reimbursement plan inexchange for not publicizing it.”But the insurance carrier demands a

certain zeal before making a payment.

frequently. “In this day and age ofelectronic banking, it’s very easy forthe treasurer or someone on theboard to have electronic access to theaccount. They can view statementsonline. They can even go in and takelook at individual checks, or see whoendorsed them,” she says.

Divide UpFinancial DutiesAnother useful precaution, Dunham

says, is dividing up financial duties. “Aseparate person would make depositsthen the person who reconciles thebank account. And in small organiza-tions, where you don’t have the abilityfor different people to take in themoney and make the deposits and dothe accounting, then there needs to besomeone else who can at least reviewwhat’s being done,” she says. Properoversight cannot only prevent theft,but can prevent a board member frombeing “falsely accused of doing some-thing that is improper,” Dunham says.Education of board members is

another key component in preventingtheft, says Dunham. Board memberscan take local community collegeclasses or seminars offered by theCommunity Associations Institute,she says. “Whoever gets elected [tothe board] needs to understand theirfiduciary duty,” she says. “They [con-dominiums] have laws they functionunder. They file tax returns, they hireemployees and enter in contracts. Sothey’re businesses.”

Greg Olear is a freelance writer and afrequent contributor to New EnglandCondominium magazine.

Managing Editor Jim Douglass contributedto this report.

“You have to be willing to prosecute,”Stacy says. “In a small building, itcould be someone’s brother or a familymember who’s been playing the horses,and always intended to pay the moneyback. The person who caught himdoesn’t want to put him in jail. Heonly wants it to end.”Condominiums that want to avoid

thefts in the first place, can take anumber of steps, according to CynthiaDunham, executive director of TheLeadership Centre in Chandler,Arizona, a non-profit organizationthat educates HOA board memberson a variety of issues, including theftprevention.“There is no substitute for board

diligence,” says Dunham. Boardmembers, she advises, need to taketime out of their busy schedules tocheck on the condominium account

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Say your HOA has a fire, and winds up witha million dollars in the bank from the

insurance settlement. The treasurer,who is retirement age,

might not haverisked going

to jail for$30,000. Butseven figures

may prove tootempting.