Executive highlights potentially 'devastating' impact to consumers
Stricter enforcement of replacement cost value (RCV) insurance policies by Fannie Mae and Freddie Mac could significantly weigh against affordability for US homeowners, according to the senior vice president of federal and political affairs at the National Association of Mutual Insurance Companies (NAMIC).
Jimi Grande (pictured top) told Mortgage Professional America the prospect of higher insurance costs could be “devastating” to the insurance market and consumers across the board.
The topic arose in February of this year as Fannie clarified that its Selling Guide required RCV coverage to be provided by insurers for most mortgaged homes. However, on May 8, it announced it would not cite findings for lender or servicer noncompliance related to those clarifications until further notice.
The agency said actual cash value (ACV) policies, which do not require insurance at the full value of a property, would provide “substantially less” coverage to homeowners after a loss, meaning they’re usually on the hook for higher repair expenses.
Property insurance claims, Fannie said, are already required by its Selling Guide policy to be settled on a replacement cost basis, with the GSE never having accepted property insurance that settles claims on an actual cash value basis.
Lenders who deliver loans to the agency are required to comply with Selling Guide requirements and guidelines, with the borrower having the right to select their insurer of choice for property insurance – provided it meets Fannie’s requirements.
Freddie Mac also highlighted that its RCV coverage requirements are not a new policy for the agency, as noted in its Industry Letter from May on the same topic.
‘People are struggling right now’
Grande believes those hardest-hit by stricter enforcement are likely to be lower-income current or hopeful homeowners for whom affordability is already likely much more stretched than high earners.
The US’s housing market has been significantly strained in recent years by high home prices and rising mortgage rates, which remain well above the levels seen during the COVID-19 pandemic despite falling over the summer. “People are struggling right now in affording houses for all sorts of reasons,” Grande said.
Mortgage rates in the US jumped last week, with Freddie Mac reporting a 30-year fixed rate at 6.12%. Mackenzie Barrett of Safetrust Mortgage notes the challenge this poses for brokers, particularly with refinancing.https://t.co/AR4VXzYRoL
— Mortgage Professional America Magazine (@MPAMagazineUS) October 9, 2024
“The cost of the house is more, the cost of the repair is more, the cost of the materials is more. Insurance is more.”
Fannie reiterated that its Selling Guide policy requires one-to-four-unit properties to be insured for either 100% of the replacement cost values or unpaid balance of the loan, provided it equals no less than 80% of the replacement cost value of the improvements, while project developments are required to be insured for 100% of the improvements’ replacement cost value.
Recent updates or communications, it emphasized, have not changed those requirements.
Grande believes government-sponsored enterprises (GSEs) should not intervene in the insurance space. “It’s hard to understand what they were trying to fix exactly,” he said. Fannie, for its part, said it requires satisfactory insurance for collateral on its loans as an insured party under property insurance policies.
Could stricter enforcement still come about in the future?
The Federal Housing Finance Agency (FHFA) still plans to revisit the enforcement at some point in the future, although Grande said NAMIC is working with decisionmakers to put across the insurance industry’s opposition – and the likely knock-on effect on homeowners.
The agency’s decision to launch a stakeholder feedback process is a positive one, he said. “It seems smart and genuine. Now, it should have been done before the guidance [was issued], but at least they’re stopping and trying to study the market now.”
Still, mortgage brokers and their clients should be aware of the prospect of stricter enforcement, he said, and realize its potential impact on the housing market’s affordability outlook.
“We have an ongoing dialogue with the agency itself but we’re also talking to every member of Congress and talking to them about what the housing market looks like in their districts,” Grande said, “and warning them that if a policy like this were to go into place, they’re going to get calls from a lot of their consumers complaining that their insurance costs more money because of this rule.”
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