In our last post, we looked at how baseline funding may be viewed differently in light of the recent Fannie Mae update. These changes generally align with Freddie Mac and reflect a broader shift in how reserve funding is evaluated in lending. Another part of the update concerns how reserve allocations themselves may now be evaluated during lending review.
Funding Recommendations
One change is that, when a reserve study is relied upon, the budget should reflect the highest recommended reserve allocation in the study.
This may be a meaningful shift for communities that have historically treated reserve studies as providing several options, allowing flexibility to choose the lowest acceptable path.
Boards still make their own decisions, but this may place more weight on the recommendation itself when lending-related situations review reserve studies.
15% of Budget
Another change is the increase in the replacement reserve requirement from 10% to 15% of the annual budget.
One important point is that this refers to the overall budget, not percent funded.
Those are two different concepts:
- 15% of budget refers to how much is being contributed each year
- Percent funded reflects how well the reserves are funded overall, based on the age and cost of the components
In other words, a community can meet a 15% contribution level and still be underfunded, or exceed it and be well funded, depending on its starting position.
We’ll share one more observation in our next article on where these types of changes may be most likely to show up in practice.
If you have a property or situation you are already thinking about, feel free to reach out. If helpful, you can also request a reserve study proposal here.
