Fannie and Freddie Hit Pause on Replacement-Value Requirements for Home Insurance

Property insurance groups on Wednesday applauded a decision by Fannie Mae and Freddie Mac to hold off on an apparent plan to scrutinize mortgages on homes that don’t carry full replacement-value insurance coverage.

The decision by Fannie and Freddie to temporarily suspend enforcement of some guidelines now “creates an opportunity to speak with insurers and other stakeholders to gather more information about the problem of underinsurance, what they can do to help, and how they can best go about it,” the National Association of Mutual Insurance Companies’ Jimi Grande said in a statement Wednesday.

“Requiring full replacement coverage and an annual verification would come at a higher cost and may not always be the best choice for homeowners,” he added.

Fannie Mae and Freddie Mac, the quasi-governmental corporations that buy mortgages from lenders and help support a robust housing market, had posted bulletins in February that some in the insurance community took to mean that the mortgage backers were stepping up enforcement of replacement coverage compliance, starting June 1. That set off alarm bells in an industry that has been moving toward actual-cash-value policies and endorsements, especially for roofs, as a way to reduce losses and give homeowners an option to mitigate premium increases.

NAMIC and Big I, the Independent Insurance Agents and Brokers of America, in April sent a nine-page letter to Sandra Thompson, director of the Federal Housing Finance Agency, which has some oversight over Fannie and Freddie. The letter warned that the rule will disrupt insureds, insurers and agents already dealing with escalating premiums and capacity issues.

But Fannie and Freddie officials suggested earlier this week that the concerns were overwrought: The replacement-coverage guidelines have been in place for years, and the recent bulletins simply clarified things. Some insurance advocates, though, were worried. They have said that the mortgage-buying corporations have rarely enforced anti-ACV rules through the years, and the February updates seemed to signal a new crackdown.

“The FHFA may not believe it was a significant change, but many in the insurance industry have certainly seen it differently and believed these requirements, had they taken effect, would have caused significant damage to the industry and the marketplace,” said Grande, senior vice president for federal and political affairs at NAMIC.

Fannie Mae’s and Freddie Mac’s language in their Wednesday notices was similar, if bureaucratic: “…In coordination with Freddie Mac and FHFA and until further notice, we have decided not to cite findings for noncompliance related to obtaining property insurance replacement cost values for the purposes of determining coverage amount sufficiency, including any failure to obtain lenderplaced insurance for a coverage shortage due to failure to utilize replacement cost value,” reads the May 8 Selling and Service Notice from Fannie Mae.

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A spokesman for Freddie Mac said the notice means: “We are temporarily not going to require servicers to take action when we note noncompliance with obtaining RCV during certain procedural reviews.”

NAMIC officials have taken it to mean Fannie and Freddie have hit the pause button and will now obtain more input from stakeholders.

“During this period, we will conduct additional research and industry engagement to evaluate the reported obstacles to lenders’ and servicers’ compliance with our requirements related to replacement cost value,” the Fannie Mae notice reads.

Some Florida insurance carriers have been particularly keen on limiting some types of coverage, after they felt the sting of exaggerated roof claims and heavy losses from full-replacement claims in recent years. In the last 24 months, a number of Florida carriers have begun offering optional ACV endorsements for roofs, and they are breathing a sigh of relief after Wednesday’s announcement.

“This restores consumer choice and allows policyholders to match coverage with their pocketbook,” said Lisa Miller, a longtime insurance industry veteran and a former Florida deputy insurance commissioner.

The Fannie and Freddie notices said that other parts of their guidelines still apply, including the requirement of force-placed insurance when a borrower does not maintain adequate coverage.

“Freddie Mac is still requiring policies to be settled on a replacement cost basis, we’re just pausing citing findings for instances where the servicers do not obtain the replacement cost value estimate to determine if the coverage limit of the policy meets our minimum requirement,” the spokesman said in an email.

NAMIC, which speaks for some 1,500 member companies, said it is ready and willing to meet with Federal Housing Finance Agency officials to develop “a more appropriate policy.”