Update: Fannie Mae Guidelines Raise Concerns, Could Bar ACV Coverage for Homes

An updated guideline from Fannie Mae, if it stands, could throw a wrench into the property-casualty insurance industry’s move toward actual cash value for more homeowners and condo coverage.

A Fannie Mae spokesperson said the government-backed mortgage corporation, which supports a large share of the U.S. mortgage market, has clarified a long-standing guideline that requires that insurance polices provide replacement value coverage for most homes with mortgages.

“Fannie Mae’s longstanding Selling Guide policy requires property insurance claims to be settled on a replacement cost basis. Updates made to Fannie Mae’s Selling Guide in December 2022 and February 2024 further clarified that Fannie Mae’s well-established property insurance requirements do not allow claims to be settled on an actual cash value basis, as well as related lender and servicer responsibilities,” the corporation noted.

Freddie Mac, which mostly buys loans from smaller lenders, has also had its replacement-cost requirements in place for years, but early this year reiterated the stand in updated guidelines.

Some in the insurance industry have said the updates appear to mark a new emphasis on replacement coverage and away from ACV. An April 17 letter from the National Association of Mutual Insurance Companies and Big I, the Independent Insurance Agents and Brokers of America, urged the Federal Housing Finance Agency to suspend the changes immediately. The groups warned that the rule will disrupt insureds, insurers and agents already dealing with escalating premiums and capacity issues.

See Follow-up: Fannie and Freddie Hit Pause on Replacement-Value Requirements for Home Insurance

“Requiring, without exception, that all consumers with mortgages owned by Fannie Mae and Freddie Mac obtain full replacement cost coverage will logically, by the very nature of this mandate, exacerbate existing challenges,” the letter reads. “While the GSE guidance is no doubt well-intentioned, it establishes requirements that will have a real-world impact on the many homeowners who are unable to satisfy the coverage requirements or who are forced to purchase a higher-cost insurance product in order to do so.”

Insurance agents would be left in a tough position by such a rule change and would have to inform homeowners that an option to help limit premium spikes is about to be taken off the table, the letter noted. And some property insurers have entire product lines that offer ACV for homes with mortgages, policies that are favored by insureds who may not be able to afford replacement-based premiums, said Jimi Grande, senior vice president for federal and political affairs at NAMIC.

It’s not clear how much of a change the guidelines create, and why the replacement value rules are in place now, in the midst of a hard market and burgeoning loss costs for property insurers. But the NAMIC and Big I letter may have done some good: Federal housing finance officials are expected to announce later this week that they are willing to put a pause on the new guideline and speak with stakeholders.

“We’re thankful. It sounds like FHFA will postpone this rule and let stakeholders come together and talk about it,” said Nathan Riedel, senior vice president for federal government affairs.

Offering actual cash value has been a growing trend around the country in recent years, but especially in Florida and especially for roofs. Insurer advocates have called ACV a simpler, fairer way to cover roofs in the wake of thousands of Florida roof claims that insurers said were fraudulent or exaggerated by some public adjusters, unscrupulous roof contractors, and by some plaintiffs’ lawyers.

Florida lawmakers have repeatedly introduced legislation that would have allowed more policies to cover only the current value of roofs, as opposed to full replacement value, which can add thousands of dollars to the cost and hundreds of dollars to premiums.

“It’s about 25% more expensive to go with replacement value than with ACV,” said Scott Johnson, of Tallahassee, a longtime insurance educator, author and consultant.

Senate Bill 1728, introduced in the Florida Legislature in 2022, came close to allowing more policies to provide only ACV coverage for some homeowner roof claims. The bill passed the Senate that year but died in the House of Representatives.

Since then, though, the Florida Office of Insurance Regulation has allowed something of a work-around: Regulators interpreted existing state law to allow carriers to offer optional endorsements that limit roof replacements and limit the amount that a policy will pay to cosmetically match new roof material to old. Several carriers have moved quickly to offer the endorsements in the last year or so, giving insureds an option.

In 2022, Florida Senate Bill 4D also revised building codes. The codes now no longer require full roof replacements when only part of the roof is damaged. Florida court rulings also have eased the replacement requirement in some cases.

In Kentucky last fall, the state Department of Insurance also weighed in on the issue. It posted an advisory opinion, essentially allowing insurers to avoid full roof replacements if the same type of shingle is used for repairs, even if the new shingles don’t exactly match the old ones in color.

Grande, of NAMIC, speculated that the FHFA may have had good intentions to protect homeowners, but the agency did not consult with enough experts in the insurance world. Perhaps regulatory officials had heard from consumer groups that some people weren’t getting full replacement value from insurers when their homes were damaged, and the agency wanted to help assist residents, Grande noted.

“That’s a nice sentiment but it was horribly ignorant and wrong,” he said. “It’s weird that no one in the food chain caught that before the guidelines were published.”

Removing ACV coverage undermines a choice that many homeowners have embraced as a way to reduce premium increases in recent years, he and Big I’s Riedel pointed out.

A Fannie Mae official said that the clarifications “were intended to help assure borrowers have sufficient property coverage in the event of a loss and promote sustainable homeownership.”

Replacement costs also have been a tricky issue for some insurance agents in recent years. An insurance carrier’s replacement cost estimator tools are often considered proprietary, and Florida statutes and agents’ contracts bar lenders from requiring agents to provide the cost estimators, explained B.G. Murphy with the Florida Association of Insurance Agents.

“The new guidance to sellers/servicers of Fannie/Freddie-backed mortgages will likely reignite this problem for Florida’s independent insurance agents,” Murphy wrote in a blog post last week.

It is unclear the number of homeowners with mortgages in Florida and elsewhere that have opted for actual cash value policies. Florida regulators and officials with the state-created Citizens Property Insurance Corp. could not be reached Monday.

This is not the first time Fannie and Freddie have shaken the Florida housing and insurance markets.

In early 2022, the corporations began requiring lending institutions to evaluate the condition of condominium buildings before approving loans, in the aftermath of the Champlain Towers South collapse that killed 98 people.

A year later, some Florida-domiciled carriers withdrew from the Demotech rating firm’s financial stability rating system. But Freddie Mac caused some consternation when it temporarily delayed approval of another rating firm’s ranking system for insurers.

Likewise, the latest rule change has caused “uncertainty and apprehension” as the rule implementation date approaches, the NAMIC and Big I letter said.

Update: This article was updated May 7, 2024 to include more information from Fannie Mae and Freddie Mac, and to show that the replacement-value guidelines have been in place for a number of years.