FHA’s Proposal for Private Flood Insurance Applies to Reverse Mortgages

The Federal Housing Administration (FHA) last week released a proposed rule which would allow a private flood insurance option instead of insurance through the National Flood Insurance Program (NFIP), when flood insurance is required by FHA. This is a change that would potentially apply to all single family mortgage programs under FHA, including the Home Equity Conversion Mortgage (HECM) program.

“The proposed changes would allow lenders to begin accepting private flood insurance policies for single family insured loans for homes located in Federal Emergency Management Agency-designated Special Flood Hazard Areas (SFHAs), consistent with similar provisions in use by other industry participants,” FHA said in its announcement of the proposed rule which would apply to Title I manufactured home loans, Title II single-family home loans, and HECM loans.

“Our proposal would expand the options for obtaining flood insurance, rather than continuing to lock in borrowers to one federal option without any ability to comparison shop,” said FHA Commissioner Dana Wade in the announcement of the proposal. “We are also proposing important safeguards that will help protect borrowers, so their homes will have flood insurance coverage at a level at or above the level available through the National Flood Insurance Program.”

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This is also seen as a opportunity to allow consumers to find an insurance product that is right for them without unnecessary red tape, according to Deputy Assistant Secretary for Single Family Housing Joe Gormley.

“This proposal will remove yet another unnecessary regulatory barrier to doing business with FHA and can also reduce costs to the federal government-costs that are ultimately born by the taxpayer,” said Gormley. “Allowing participation by private insurers should generate the competition needed to ultimately reduce costs for consumers.”

This proposal marks another instance of the federal government stepping in to provide guidance for reverse mortgage borrowers afflicted by natural disasters. In late 2019, the Consumer Financial Protection Bureau (CFPB) also published guidance for older homeowners who are borrowers of HECM reverse mortgages, and what they can do if they find themselves affected by a natural disaster.

The proposed rule about flood insurance will be published in the Federal Register soon, and will provide for a public comment period of 60 days to gauge the public’s receptivity to the proposal. As this is only a proposal, mortgagees and mortgagors must conform to the existing guidelines related to flood insurance for all single family mortgage programs under FHA, including the HECM program.

Read the announcement of the proposal at FHA.

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