The U.S. Department of Housing and Urban Development (HUD) on Monday published a new final rule in the Federal Register, allowing borrowers of Federal Housing Administration (FHA) loans situated in a Special Flood Hazard Area the option to purchase private flood insurance. The new rule encompasses borrowers of Home Equity Conversion Mortgages (HECMs).
The new notice in the Federal Register was detailed in Mortgagee Letter 2022-18, also released on Monday.
“Today, HUD is increasing the flood insurance choices available to individuals and families with FHA-insured loans in areas that FEMA has designated to be at special risk for flooding,” said HUD Secretary Marcia Fudge in a statement. “Flood insurance is required to ensure families and individuals are prepared if disaster strikes. Increasing consumer options for this important protection is one way we are building more resilient communities in the face of climate change.”
Opening up the market
FHA Commissioner Julia Gordon acknowledged that new costs may be difficult to absorb in the current economy, but that costs associated with flooding in areas identified as high-risk would be potentially more devastating.
“We know borrowers face affordability challenges right now, yet a flood can be devastating to a family who is not properly insured,” Gordon said. “The choice to select a private flood insurance option may enable some borrowers to obtain policies that are less expensive or provide enhanced coverage.”
FHA submitted a proposal to this effect during the Trump administration in November 2020, 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 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 then-Deputy Assistant Secretary for Single Family Housing Joe Gormley in the proposal. “Allowing participation by private insurers should generate the competition needed to ultimately reduce costs for consumers.”
Reverse mortgage industry effort, reaction
In January 2021 shortly after the transition to the Biden administration, the National Reverse Mortgage Lenders Association (NRMLA) submitted comments to HUD in support of the option for such-situated HECM borrowers to be able to purchase private flood insurance.
“Permitting FHA borrowers to pursue private flood insurance will help engender a more robust private market and better provide consumers with greater choice and access to flood insurance across the United States,” NRMLA’s comments said in January.
In a report released earlier this year by the HUD Office of the Inspector General (OIG) revealed that the HECM program may have controls lacking to ensure adequate flood insurance, noting guidance issues on the topic between regulations and the reverse mortgage sections of the Single Family Housing 4000.1 handbook.
The handbook, the report said, did not include any provision “to calculate the minimum insurance coverage amount based on replacement costs,” nor did it instruct the reverse mortgage servicer on an affected loan on how that entity should determine any discerned replacement cost.
“Further, it did not state whether the insurance amount should be set based on the unpaid amount at the beginning of the policy period or at the end,” the report goes on to say. “Because HECM loans’ unpaid balances increase over time, the policy amount will be sufficient throughout the policy term only if it is set based on the scheduled value at the end of the term.”
In a recent interview for an upcoming episode of the RMD Podcast, Celink SVP of Client Satisfaction Gail Balettie lauded the move as it relates to helping reverse mortgage borrowers mitigate the risks associated with living in at-risk areas for flooding.
“Allowing borrowers to purchase private flood insurance will allow the market to open up and compete with the National Flood Insurance Program,” Balettie told RMD. “It expands the market and provides, really, a pathway to competition. And in the end, when there’s competition, the consumer is going to win.”
Read ML 2022-18 at HUD.