More than two years and a change of administration later, the Federal Housing Administration has finally issued a rule stating that it will insure mortgages that use private flood insurance.
The rule goes into effect Dec. 21, but not all private flood insurance policies offered on the market will be eligible for inclusion in FHA loans, the agency warned.
Until now, FHA only insured mortgages on properties in special flood zones that were covered by the government’s National Flood Insurance Program.
The Biggert-Waters Insurance Reform Act passed in 2012 required government-sponsored businesses and federal agencies to accept private flood insurance policies. But the letter from the mortgagee announcing the rule change said Biggert-Waters did not apply to FHA.
On November 10, 2020, then-Federal Housing Commissioner Dana Wade, a Presidential appointee. Asset, propose a rule for private flood insurance, which this letter from the mortgagee turns into a final rule.
With the new rule, the FHA will require lenders to provide detailed flood insurance coverage information when submitting mortgages electronically for its insurance policies on properties in special flood zones ( SFHA), locations mapped as flood prone areas.
Obtaining this data is an objective included in the Climate Plan of the Department of Housing and Urban Planning. FHA will be able to capture and analyze flood insurance information at a more granular level than before.
“We know borrowers are facing affordability issues right now, but a flood can be devastating to a family that isn’t properly insured,” Federal Housing Commissioner Julia Gordon said in a news release. . “Choosing to choose a private flood insurance option may allow some borrowers to obtain policies that are less expensive or provide improved coverage.”
FHA is exposed to $4.5 billion in potential flood damage beginning in 2020, loans that do not have adequate coverage, an audit by the HUD Inspector General’s Office determined. A private alternative is likely to increase the share of borrowers living in SHFAs who obtain and maintain flood insurance.
Housing trade groups applauded the announcement.
“While the final rule is a win for FHA borrowers, there are concerns that the lack of full alignment with federal flood insurance requirements could lead to some flood policies being rejected on loans. from the FHA that are acceptable for other federally guaranteed loans,” Mortgage Bankers Association President and CEO Bob Broeksmit said in a statement. “MBA will continue to work with HUD on improving housing policies and regulations that benefit borrowers while maintaining the safety and strength of the FHA program.”
Since borrowers with flood insurance are less likely to default, this change will help further protect the Mortgage Insurance Mutual Fund, Broeksmit said. The fund is currently in very good health, with a capital ratio of 11.11%, the FHA has just announced.
“The new rule is a victory for consumers, for choice and for flood coverage that will protect more borrowers and property from the number one natural disaster in the United States,” said Kenny Parcell, president of the National Association of Realtors. statement. “The NAR has long advocated for an updated rule to address an inequity with conventional borrowers, and this action will increase the flood insurance choices available to FHA borrowers.”
Last year was the second-best year of the past five for private flood insurance in terms of net written premiums, at $506.8 million, surpassed only by 2019’s $522.6 million, according to the Insurance Information Institute.
By comparison, the NFIP recorded $3.5 trillion in premium income in federal fiscal year 2021, according to the Federal Emergency Management Agency’s website.