A Judicial Win for Earned Interest on Deposits in CA?

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BREAKING NEWS:

Condominium and HOA management companies who get -or are thinking of getting- earnings on association deposits should pay close attention to a recent decision in a Federal District Court in California

-See Order Riva v. Management Trust Federal District Court California Eastern District Court. 

Stephen Marcus, of Marcus Condo Law

“I am told some in California are viewing this as a big win for Management Trust on earned interest on deposit,” he said. “The Order denied the motion to certify the class largely based upon failure to show "concrete injury" by failing to show a loss to the associations and failure to show "informational injury" by failing to disclose.”

He noted the court permitted Riva to amend it’s complaint, but did not permit it to add new claims.

“I think some are not convinced this is a loss for Riva,” he said. "Despite the Court not finding informational injury by failure to disclose, I would suggest disclosure that there is a fee. However, I would not have any obligation to report say each month or year what the dollar amount is since the association knows there is a fee from the management agreement. I have another suggestion as well but you have to call me (no charge) at 781-413-5226 to hear that idea. Are other management companies in or outside of California also charging a fee? I don’t know.”

“Others will disagree but if there is disclosure and the manager doesn't just increase the management fee to make up for lost amounts, I think the Order made sense but I am sure the litigation will go on for a long time with twists and turns so who knows how it will turn out so stay tuned here for updates.”

Changes in Fannie Mae rules will require most condo boards and HOAs to raise their monthly fees

Effective January 1, 2027 Fannie Mae will require condominium boards and HOAs to maintain 15% of their annual budget in reserves in order for their individual units to be eligible for Fannie Mae loans. The current requirement is 10%. This will necessitate an increase in monthly fees for most associations.

“Boards should be preparing budgets now if they operate on a calendar year, said Stephen Marcus of 2027 in Braintree. “It will very likely result in increases in condominium fees in addition to any other increases in the budget. That is, unless a reserve study performed within the last 3 years calculated based on highest level of funding indicates that they can budget lower than 15%. Boards and managers may want to communicate this change to owners now so unit owners are prepared and don’t get surprised or upset when they see the increase when the budget is published.”

Also, effective August 3, 2026, Fannie Mae and Freddie Mac have ended Limited and Streamlined Reviews, except for small condo projects of between 2 and 10 units (with some exceptions). All other projects will require a full review to be eligible for the government-backed loans. This could result in delayed transactions or even denials.

The National Association of Realtors (NAR) said associations greater than 10 units “will face higher reserve and documentation expectations, which could increase HOA fees or result in special assessments.”

Robert Smith, a regional president at FirstService Residential told The Real Deal, “Communities that consistently invest in reserves, keep financial records current and plan will generally be in a stronger position when lenders evaluate the property.”

We are fortunate to have so many great management companies in Greater Boston such as Barkan, Brigs, Associates/The Dartmouth Group and so many others. Of course the managers simply suggest to the volunteer boards what to do. The boards make the decisions.

Mortgage Bankers Association president and CEO Bob Broeksmit had an completely favorable view of the changes.

“Importantly, the condo insurance requirements will reduce costs for existing homeowners and will make tens of thousands of additional units eligible for lower cost GSE financing,” he said. “Expanding the number of properties that can access conventional financing is a direct benefit to prospective buyers and an important step in the ongoing effort to improve housing affordability.”

Stephen Marcus is very interested in how these changes will impact management companies since we expect more lender questionnaires and more focus on insurance, reserves, critical repairs, etc.  

“The expectation is that more condominiums will end up on the ineligible to loan lists (aka the "Blacklist") but we won't know since that list is not public,” he said. “Management companies and boards should consider reviewing their charges to lenders and sellers lender questionnaires since more work will be expected such as providing condition and reserve studies, information on litigation other than collection actions etc.”

We can likely expect more delays in individual transactions as well as more transactions falling apart due to increased friction resulting from the changes, he added.

These changes could increase costs for management companies and associations due to the increased need for legal review or lenders requests for information.

None of this is to say that Fannie and Freddie's increased requirements are a bad thing, Marcus said. It may be a small price to pay for more diligent review by lenders and servicers for Fannie Mae and Freddie Mac. At this point, it just too early to say.

Please let me know your thoughts and what you're seeing.

And please feel free to forward this email to anyone you think may be interested, especially other property managers and condominium board members.

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Marcus Condo Law offers free presentations to management company managers on these changes and other legal issues property managers in an iterative format.