Creative solutions to lender requirements

Finding flexibility: How affordable housing borrowers can navigate tough lender demands

KEY TAKEAWAYS

Affordable housing borrowers often face a mismatch between what lenders require of their insurance programs and what the market will support.

Creative borrowers and their insurance brokers can obtain waivers if they propose alternative insurance solutions, supported by strong data.

Proactively working with lenders and carriers on unique solutions can result in program flexibility, reduced costs, and better and more sustainable risk management.

The economic principle of supply and demand would suggest an ample market exists for affordable housing.

According to the Harvard University Joint Center for Housing Studies, 43.5 million households — or roughly a third of U.S. households — were cost-burdened in 2024, meaning they spent more than 30% of their income on housing. 

Yet, the supply of affordable housing lags far behind demand.

The challenges of developing and maintaining affordable multifamily housing are complex and layered. Complex capital stacks that include tax credits and subsidies, along with higher borrowing costs, compress margins for affordable multifamily housing.

Another complicating factor: Stringent and hard-to-meet lender requirements for insurance.

Government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) hold a substantial share of affordable multifamily loans.

However, Fannie Mae’s and Freddie Mac’s insurance requirements are often misaligned with what the market will support. Commercial mortgage-backed securities loans and traditional bank lenders also impose tough insurance requirements.

Requirements such as very low retention levels, broad liability coverage grants, and specialized protections for exposures including habitability, assault and battery, and firearm-related incidents can be difficult to procure. When they are available, they may come at a significant cost. These constraints can place additional financial pressure on housing providers already operating within tight budget parameters.

Flexibility may exist when insurance requirements prove difficult or prohibitively expensive to obtain. In many cases, lenders are receptive to alternative structures when supported by underwriting data, loss experience, and market feedback demonstrating that the proposed approach provides comparable protection without materially increasing lender risk.

No. 1 priority – there has to be client buy-in. The client has to commit to reviewing their program design with us to find a solution against increasing costs year over year.

Meagan Baker-Costas Assistant Vice President, Real Estate Lockton

Challenging lender requirements

Lenders often require affordable housing borrowers to obtain low retentions in their insurance programs. Lenders want to make sure borrowers have the financial capacity to fund retentions, and they want to avoid a scenario where an underfunded loss places the loan at risk.

For example, the U.S. Department of Housing and Urban Development limits retentions to $10,000. But the insurance market is often reluctant to agree to these retention levels and, in many cases, is moving in the opposite direction. Rising claim severity has led many insurers to require higher retentions as a condition of providing coverage.

Additionally, lenders often seek broad insurance coverage to minimize the potential for uninsured losses that could impair a property’s operations or value.

For lenders, these policies offer protection from default if a borrower is hit with a significant claim.

This creates a fundamental tension within the affordable housing sector. Lenders are focused on protecting the loan and ensuring that catastrophic losses do not go uninsured, while insurers are increasingly narrowing coverage for the very risks that have generated the largest claims.

Affordable multifamily property owners have limited options to proceed with such lender requirements. They can purchase insurance that strictly complies with lender requirements, often at a significantly higher cost.

Given the thin margins in multifamily housing, this is an undesirable solution, as higher insurance premiums can cause owners to defer maintenance and delay other investments the property may need.

Alternatively, owners can work collaboratively with lenders and Lockton to develop structures that achieve the same risk management objectives while remaining economically sustainable. These solutions may include higher retention levels supported by historical loss experience and details on robust risk management programs supported by Lockton Loss Control Consultants and the Claims team.

In many cases, lenders are willing to consider alternative approaches when presented with data demonstrating that the borrower can absorb retained losses without jeopardizing the asset or loan performance.

Lockton has successfully partnered with borrowers and lenders to demonstrate how alternative retention levels, coverage structures, and risk financing strategies can provide equivalent protection for the lender while better aligning with current insurance market realities.

Property owners must be willing to commit to the process of obtaining a waiver. While the effort can be significant, the outcome may result in a more sustainable insurance structure that continues to protect the lender's interests while reducing the financial burden on the property.

CASE STUDY

Multifamily housing client

Turning insurance challenges into long-term stability

The challenge for borrowers extends beyond stringent lender requirements. There is often a disconnect between standard insurance requirements and the feasibility of those coverages available for affordable housing clients. In these situations, a more tailored insurance strategy may be necessary.

Read the solution

Lessons learned

Strong borrower-lender relationships can play a critical role when seeking flexibility around insurance requirements.

While brokers can provide market intelligence, coverage analysis, and supporting data, conversations are often most effective when senior executives from the borrowing organization can directly engage lending partners and explain the business impact of certain requirements. Establishing a dialogue focused on protecting the assets and loan, rather than simply reducing insurance costs, can help create a more productive path forward.

Lockton's role is to help clients build that case. By combining market expertise, claims analytics, benchmarking, lender negotiations, and dedicated loss control consulting, we help borrowers demonstrate that alternative insurance structures can achieve the same risk management objectives as prescribed requirements.

“No. 1 priority — there has to be client buy-in,” said Meagan Baker Costas, Assistant Vice President of Real Estate. “The client has to commit to reviewing their program design with us to find a solution against increasing costs year over year.”

Our experience navigating these discussions enables clients to pursue practical solutions that balance lender expectations, insurance market realities, and the long-term financial sustainability of affordable housing communities.