Earlier this year, at the direction of the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac updated their selling and servicing guides to clarify various lender and servicer responsibilities related to monitoring and verifying property insurance coverage. 

The updated guidance was set to take effect on June 1 and would have impacted a significant portion of the property insurance market by requiring mortgagors to acquire replacement cost value (RCV) coverage for their property. 

Given that the National Association of Realtors estimates that Fannie and Freddie support approximately 70% of the mortgage market, this change would 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 to do so. 

However, on Wednesday, at the request of the Big “I" and other stakeholders, Fannie and Freddie announced that the June 1 implementation of this updated guidance is being postponed indefinitely. The Big “I" was the only agent trade association to weigh in on this issue with the FHFA and government-sponsored enterprises (GSEs), communicating with each and submitting a joint letter with the National Association of Mutual Insurance Companies stating that the guidance would exacerbate existing challenges in the property insurance market. 

The action taken by Fannie Mae and Freddie Mac to delay implementation of the guidance will allow stakeholders to come together and discuss the issue and the Big “I" appreciates the willingness shown by FHFA and Fannie and Freddie to reconsider the updated guidance. 

The guidance would require homeowners to obtain complete RCV coverage for all aspects of their homes and explicitly states that actual cash value (ACV) coverage is unacceptable. Importantly, this mandate includes roofs, even though lenders and servicers in the vast majority of states have long accepted the use of ACV for roofs. 

Obtaining adequate coverage for roofs is already incredibly difficult in the current hard market and this would have exacerbated that problem. According to the updated Freddie Mac guide, “Insurance policies must provide for claims to be settled on a replacement cost basis. Policies that (1) provide for claims to be settled on an actual cash value basis, or (2) limit, depreciate, reduce or otherwise settle losses for less than a replacement cost basis are not eligible." 

While FHFA argues that the requirement is not new to the market, the guidance directed FHFA and Fannie Mae and Freddie Mac to more aggressively audit service providers and enforce the mandate without exception. 

Additionally, the new requirements would require the RCV to be verified as of the current property insurance policy effective date. Given that the term for most residential property insurance policies is one year, it is likely that such verification would need to occur on an annual basis, creating a whole new set of challenges to verify values and provide documentation. 

According to the updated guide from Freddie Mac, “Seller/Servicers must verify the RCV in order to complete the calculation (adequate insurance coverage) ... The verification source may be (1) the replacement cost estimator utilized by the insurance carrier or an insurance risk appraisal; or (2) statement from property insurer, an independent insurance risk specialist, or other professional with appropriate resources to make such a determination." 

This reference to replacement cost estimators (RCEs) would likely increase the number of lenders asking for them, which is problematic because RCEs are often prohibited by contract and/or state law from releasing estimators to anyone. Even more concerning is that if the expectation is for agents and insurers to respond to sellers and servicers on a mass scale, this would be a huge administrative task given the volume of such information, not to mention the added liability exposure that this increased role in producing documentation and verification will bring upon agents. 

As the leading insurance agent association in the U.S.—and the only one to have voiced concerns over this updated guidance—the Big “I" will continue to engage with FHFA, Fannie Mae and Freddie Mac, and work to positively impact any kind of guidance that is put forth moving forward. 

Stay tuned to the News & Views e-newsletter for additional updates on this issue. 

Nathan Riedel is Big “I" senior vice president, federal government affairs.