Fannie Mae, Freddie Mac press pause on insurance requirement

Two influential government-sponsored enterprises are temporarily cutting some slack to single-family mortgage companies regarding one aspect of insurance mandates after hearing some concern about it from providers of the coverage.

Fannie Mae, Freddie Mac and their regulator are providing short-term leniency on immediate compliance with requirements to obtain and document a traditional home’s replacement cost value yearly. Insurance policies must still be settled on a replacement cost basis.

“We are engaging in further dialogue with our industry partners to understand recent concerns raised related to obtaining the replacement cost value. Pending those efforts we will refrain from citing lenders and servicers for noncompliance with these requirements,” a Fannie spokesperson said, confirming the new guidance in an email.

Fannie called the replacement cost requirement a “necessary” and “well-established” practice it has engaged in “to confirm that the property insurance coverage amount is sufficient.”

A Freddie spokesperson issued a similar statement while stressing that its recent industry letter to this end “reinforces” its requirement “for policies to be settled on a replacement cost basis” 

“We are temporarily not going to require servicers to take action when we note noncompliance with obtaining replacement cost value during certain procedural reviews,” the Freddie spokesperson said.

While Fannie and Freddie say they have long required replacement cost due to concerns about depreciation (which actual cash value doesn’t account for), their recent reaffirmations of the requirement alarmed an insurance industry that said the market has increasingly moved to ACV.

In particular, a recent Fannie single-family selling guide clarification specifying claims settled for actual cash value “are not acceptable” sparked concern. Insurers also noted Freddie Mac recently clarified some single-family guidelines that stressed the replacement cost standard.

It’s an issue for insurers because they have been trying to offer more options around the basis on which claims are settled to address concerns about rising insurance costs and risks. Both have risen due to higher interest rates, climate change, floods and other hazards.

“An absolute restriction limiting the contracts that satisfy eligibility for GSE-backed mortgages to replacement cost is too narrow,” the National Association of Mutual Insurance Companies and the Independent Insurance Agents and Brokers of America said in the letter written last month. The Insurance Journal reported on the letter earlier.

Jimi Grande, senior vice president of federal and political affairs for NAMIC, welcomed the decision by Fannie, Freddie and their regulator to take some time out to consider how the issue  could be resolved without leaving any policyholders un- or underinsured.

“Insurance is getting more expensive, so a lot of times a way to make a policy affordable is to charge someone less. Many do choose the ACV policies,” Grande said in an interview.

The Mortgage Bankers Association joined Grande’s group in welcoming the enterprises’ move to put the RCV compliance citations on hold so stakeholders could determine whether or not it is still an appropriate standard.

“MBA applauds the GSEs for engaging with industry stakeholders to address mounting concerns about hazard insurance costs and availability,” the group said.

Insurers said they were initially surprised to see replacement cost stressed as the only option given the prevalence of ACV use and Fannie and Freddie’s large market share, leading them to initially believe the standard or enforcement around it was new.

“The truth of the marketplace today is many borrowers have ACV policies. It’s very common,” Grande said.

One of the biggest drivers of concern about replacement cost may be roofs, for which policies in the insurance industry have been trending toward use of ACV or cost-sharing coverage as they are big-ticket items with particularly high costs, Grande said.

(Fannie and Freddie’s multifamily insurance guidelines in the case of the apartment roofs do allow a carve-out for ACV but that part of their business has different considerations than the one that oversees insurance for traditional homes.