Florida Ratings Crisis: Fannie and Freddie Agree to Accept Citizens-as-Backstop Plan

It took more than four months, but Fannie Mae and Freddie Mac have now agreed to accept an innovative but temporary solution to Florida’s property insurer rating predicament.

The mortgage-buying giants on Wednesday sent letters to primary mortgage lenders, notifying them that they had studied and approved a Florida plan to utilize the state-created Citizens Property Insurance Corp. as a type of reinsurance backstop for struggling insurers, at least through May 31, 2023.

“In the event certain insurers doing business in Florida suffer a financial rating downgrade that would place them below our current rating requirement for property insurers … the insurer may qualify for participation in the arrangement,” officials with the Federal National Mortgage Association, known as Fannie Mae, wrote in the Dec. 7 bulletin.

The Federal Home Loan Mortgage Corp., or Freddie Mac, posted similar guidance on its website Wednesday.

Florida’s Office of Insurance Regulation devised the Temporary Market Stabilization Arrangement (TMSA) in late July, after the Demotech financial rating firm announced it was on the verge of downgrading more than a dozen carriers. Fannie Mae and Freddie Mac’s rules require that insurers for homeowners with federally backed mortgages have sparkling stability ratings.

Demotech is the chief rating firm for Florida and rates some 30 Florida insurers. Its downgrades threatened to disrupt the homeowners market and force thousands of owners to quickly find new insurance.

The stabilization arrangement takes advantage of an exception to Fannie Mae and Freddie Mac’s rules, by using Citizens, through an endorsement, to cover outstanding claims that would not be paid by the Florida Insurance Guaranty Association in case the insurer becomes insolvent and is put into receivership. The arrangement is designed to be available only until this summer.

“This unprecedented solution allows insurers to remain viable and ensures Floridians can maintain coverage in the voluntary market,” OIR said in a statement.

At the time, some in the industry welcomed the stop-gap measure, while others doubted that Fannie Mae and Freddie Mac would go for it.

But after careful review, the mortgage buying corporations said the stabilization plan is acceptable, but only for existing or renewing policies and only if the property meets all other federal requirements, including securing flood insurance, if needed.

The OIR did not indicate how many Florida insurers have signed on to the TMSA plan, but it appears that United Property & Casualty Insurance Co. may be the only one, so far. UPC is not insolvent but is shutting down and is in the middle of an orderly run-off.

It was unclear if Fannie Mae and Freddie Mac will approve UPC policies while homeowners search for new coverage. The lender bulletins noted that Fannie and Freddie will not accept property insurance policies from TMSA participants if the insurance was in place when the loan was issued.

“This Lender Letter does not authorize lenders to sell a loan to us if the property insurance is provided by a TMSA-participating insurer as of the note date,” Fannie Mae’s bulletin reads. “Property insurance provided by a TMSA-participating insurer does not meet the insurance requirements applicable upon sale of a loan to Fannie Mae.”

The mortgage corporations also cautioned that regulators and insurers shouldn’t get too excited about the possibility of other innovative ideas.

“The issuance of this Lender Letter should not be viewed in any sense as precedential,” Fannie Mae wrote. “We are responding to unique and challenging circumstances prevailing in Florida, and there is no assurance that we will respond similarly in other contexts, whether in Florida or elsewhere.”

After the TMSA program expires in May, it’s still uncertain how the insurer ratings conundrum will be addressed. Florida’s Department of Financial Services has hired a consulting firm to study alternatives to Demotech, including a state-run rating agency.

And the insurance industry is hoping that Florida lawmakers at a special legislative session next week will pass litigation reform and provide low-cost reinsurance, which could mitigate losses and improve ratings for some vulnerable carriers.