Homeowners with the Federal Housing Administration-insured mortgage financing will now be allowed to obtain private flood insurance policies, expanding consumer options to protect borrowers from the country’s major natural disaster.
The U.S. Department of Housing and Urban Development, through the FHA, announced on Monday that the change will go into effect on December 21, 2022. The final rule was published in the Federal Register and in a companion mortgagee letter that provides implementation guidance for FHA-approved lenders.
The prior FHA rule had been in place since 1968, when the private insurance market was non-existent, and it mandated that FHA borrowers with properties in flood hazardous areas must purchase food in insurance obtained through the National Flood Insurance Program (NFIP).
On the other hand, conventional borrowers have been able to choose between NFIP and private policies, since most of the federal lending regulators issued a final regulation in 2019.
With the change, the HUD is increasing the flood insurance options available to individuals and families with FHA-insured loans in areas that the Federal Emergency Management Agency (FEMA) designated to be at special risk for flooding.
“Flood insurance is required to ensure families and individuals are prepared if disaster strikes,” HUD secretary Marcia Fudge said in a statement. “Increasing consumer options for this important protection is one way we are building more resilient communities in the face of climate change,” Fudge added.
A report published by the HUD inspector general’s office in March showed thousands of FHA-backed mortgages lacked flood insurance, potentially exposing taxpayers to billions of dollars of increased liability. Of the 200,000 mortgages on homes located in areas with high flood risk, about 31,500 mortgages, worth a total of $4.5 billion, did not have the required NFIP coverage.
Homeowners without flood insurance are at risk of defaulting on their mortgages if their homes sustain major flood damage and an owner decides it’s less costly to stop mortgage payments than to pay for uninsured repairs.
“We know borrowers face affordability challenges right now, yet a flood can be devastating to a family who is not properly insured,” Julia Gordon, FHA commissioner, said in a statement. “The choice to select a private flood insurance option may enable some borrowers to obtain policies that are less expensive or provide enhanced coverage.”
The Mortgage Bankers Association and the National Association of Realtors, which has long advocated for the change, said FHA borrowers will have more choices and potentially better coverage at a lower cost.
“The increasing threat of flood damage in many areas poses a significant risk to both homeowners and the FHA program,” MBA president and CEO Bob Broeksmit said. “Accepting private flood insurance shifts some of the risk to the private market, ultimately helping to protect FHA’s Mutual Mortgage Insurance Fund.”
“The new rule is a victory for consumers, for choice, and for flood coverage that will protect more borrowers and property from the number one natural disaster in the United States,” Kenny Parcell, NAR’s president, said.
While the final rule is a win for FHA borrowers, the MBA and NAR noted the lack of complete alignment with federal flood insurance requirements that may lead to the rejection of some flood policies on FHA loans that are acceptable for other federally-backed loans.
“MBA will continue to work with HUD on improvements to housing policies and regulations that benefit borrowers while maintaining the safety and soundness of the FHA program,” Broeksmit said.