HUD to allow private flood insurance for FHA-insured mortgages
Previously, only NFIP insurance was allowed for FHA-insured mortgages, which limited consumers’ options, HUD reported.
Starting Dec. 21, 2022, homeowners located in FEMA special flood hazard areas (SFHA) that have Federal Housing Administration-insured mortgages will be able to obtain flood insurance through the private market, the U.S. Department of Housing and Urban Development (HUD) reported.
Mortgages insured by the Federal Housing Administration (FHA) are required to have flood insurance if the property is located in an SFHA. Prior to the new regulation, only coverage from the National Flood Insurance Program was allowed for FHA-backed mortgages, which limited policyholders’ insurance options, HUD reported.
Once the rule change is in effect, the FHA will require lenders to provide detailed flood insurance coverage information when submitting mortgages for FHA insurance electronically for properties in SFHAs.
“We know borrowers face affordability challenges right now, yet a flood can be devastating to a family who is not properly insured,” Federal Housing Commissioner Julia Gordon said in a release. “The choice to select a private flood insurance option may enable some borrowers to obtain policies that are less expensive or provide enhanced coverage.”
HUD reported that during the comment period for the proposed rule change, many commenters voiced support for permitting FHA borrowers to buy private flood insurance. Commenters also noted that the change would “save homeowners money, increase affordability and options for buyers and make broader coverage available at lower prices.”
The allowance of private market flood coverage has been a long time coming, as the Biggert-Waters Flood Insurance Reform Act of 2012, and amended in 2014, aimed to encourage private-market participation. Among other things, Biggert-Waters directs lenders to accept private flood insurance to satisfy the mandatory purchase requirement, instead of NFIP insurance, if the private flood insurance meets the conditions defined further in federal statute.
Craig Poulton, CEO of Poulton Associates, LLC, told PropertyCasualty360.com that the new rules will be beneficial for hundreds of thousands of flood-exposed homeowners. However, he noted it was unfortunate that the FHA denied and delayed borrowers’ ability to buy flood insurance from the same companies they were required to use for home insurance.
“It was counterintuitive then and it’s counterintuitive now that they would take such a position, especially after Congress required the lending community, in general, to accept private flood insurance years ago,” Poulton said. “This needless delay is an example of administrative bloat which seems to be everywhere present in the federal government.”
Will this lift the private flood market?
There are around 600,000 FHA-related structures that are subject to the mandatory flood insurance purchase requirements, few of which will transition into the private market in the near term, according to Poulton.
“This is due to the fact that most owners of FHA-related structures located in special flood hazard areas are severely limited in their ability to move from the NFIP to the private market by the NFIP’s refusal to return premium to consumers who wish to exchange their NFIP policy for a private market option,” he said.
However, new FHA-insured mortgages are likely to buy flood insurance from the private market, which competes on a more level playing field for new business, according to Poulton.
“Unfortunately, there are few new mortgages being created at present,” he said.
Looking at the years ahead, the rule change could result in lower premiums for policyholders.
“The broader the geographic spread of risk, the more predictable the insurance outcomes. Therefore, these new flood insurance buyers will enhance the competitive position of the private market but will do nothing to improve the position of the NFIP,” Poulton said.
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