Last year's earthquake in Southern California had an unusually severe financial impact on the area's condominiums, Freddie Mac has found.
Many condo associations had no earthquake insurance or carried high deductibles, according to Michael K. Stamper, executive vice president of risk management at Freddie Mac, formally the Federal Home Loan Mortgage Corp. As a result, many associations were forced to dissolve and their members lost their homes.
Now Freddie Mac is requiring quake insurance on some condo properties whose mortgages it will buy. The requirement will depend on the level of risk at the condo site and the structural characteristics of the building.
Geological risk factors include soil conditions, landslide potential, and fault rupture potential. The structural factors considered include construction materials, date of contruction, height of the building, and whether the home is built over a parking garage.
To make risk determinations, Freddie Mac hired Risk Management Solutions Inc., Menlo Park, Calif., to provide technical data. The company studied California's geological patterns and came up with a risk rating for each zip code.
Earthquake insurance is required in high-risk zones and not required in low-risk zones. For medium-risk zip codes, the structure of the building involved determines whether insurance is required.
"We have also seen cases where, even when earthquake insurance was in force, imprudent management of deductible funds forced condominium associations to foreclose on homeowners who were unable to pay unexpectedly high capital assessments," said Mr. Stamper.
The insurance requirement will become effective for notes dated on or after July 1, 1995, and for master purchase contracts dated on or after March 1, 1995.
