Executive highlights potentially 'devastating' impact to consumers
It may have been shelved indefinitely, but a proposal by Fannie Mae and Freddie Mac to require mortgage holders to purchase full replacement cost value (RCV) coverage for their property is one that could significantly weigh against affordability for US homeowners.
That’s according to Jimi Grande (pictured), senior vice president of federal and political affairs at the National Association of Mutual Insurance Companies (NAMIC), who 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 earlier this year as Fannie clarified that its Selling Guide required RCV coverage to be provided by insurers for most mortgaged homes, although it put those plans on the back burner in May.
The agency said actual cash value (ACV) policies, which do not require insurance at the full value of a property, provide “substantially less” coverage to homeowners after a loss, meaning they’re usually on the hook for higher repair expenses.
Proposal could hike homeownership costs
While it might have been a well-intentioned move, Grande questioned whether removing ACV policies would have been a beneficial step for homeowners.
That’s because mandatory RCV coverage would likely spike insurance costs, he said, squeezing the budgets of American homeowners and buyers who’ve already seen borrowing costs and mortgage rates ramp up in recent years. “The only potential outcome of this would be more expensive and maybe less available insurance,” Grande said. “Different companies have different underwriting guidelines and they’re only taking on so much risk from certain people.”
Those hardest hit by the proposal, he added, 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. And so one of the tools you have with insurance [currently] – you could cover your house for just your mortgage and that replacement value, if you choose to.”
Grande said it made little sense for the government-sponsored enterprises (GSEs) to intervene in the insurance space. “It’s hard to understand what they were trying to fix exactly,” he said, “because one of the challenges that’s pretty commonplace in Washington these days is that you have these large agencies that know a lot about one thing but not a lot about another.
“You’ve got an agency that runs the federally backed mortgage industry, doesn’t have any experience with insurance, and they don’t really know how insurance works. And I think well-intentioned ideas get a little too far before they stop to have conversations to understand, ‘Well, if we did that, what would that do to the market?’”
Could the change still come about in the future?
The Federal Housing Finance Agency (FHFA) still plans to revisit the adjustment 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 keep an eye on the proposal, 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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