FHA Proposes Private Flood Insurance Option

November 11, 2020

Federal Housing Administration mortgage borrowers living in federally designated flood areas may soon have greater choice in how they’re insured against floods. FHA borrowers long have been stuck in high-cost policies through the National Flood Insurance Program, but a new FHA rule could allow them to choose private insurance options that may help bring costs down, the National Association of REALTORS® said in response to the FHA’s proposed rule this week.

The FHA has proposed a rule that will allow homeowners in flood zones to take out a private flood insurance option instead of mandating flood insurance come through the National Flood Insurance Program—a move long supported by NAR. The FHA’s proposed rule would allow lenders to begin accepting private flood insurance policies for single-family insured loans for homes located in Federal Emergency Management Agency-designated flood zones, where flood insurance is required.

Current FHA policies, stemming from 1999, have prevented buyers with FHA-insured mortgages from obtaining flood insurance through any source other than NFIP.

The FHA estimates that 3% to 5% of its borrowers could opt for a private insurance policy for their FHA-insured mortgage if private policies begin to be accepted.

“Allowing participation by private insurers could generate the competition needed to ultimately reduce costs for consumers,” said Joe Gormley, FHA’s deputy assistant secretary for single-family housing, in a statement.

NAR has long supported a strengthened National Flood Insurance Program along with a robust private market to offer greater consumer choices and maintain access to flood insurance across the U.S. (Read more about NAR’s position.) “Outdated federal regulations have for too long prohibited lenders from accepting private flood insurance that is often more affordable and more comprehensive than NFIP policies,” Vince Malta, NAR’s president, said in a statement Thursday. “Although regulatory hurdles remain before this proposed rule is finalized, NAR looks forward to continuing our work alongside the FHA, HUD, and President-elect Biden’s administration to make private flood insurance more readily available to American property owners.”

Since 2016, NAR has spearheaded a coalition effort to educate the administration and Congress about the importance of private flood insurance to consumers as well as the affordability and sustainability of FHA-insured products. Earlier this year, Malta sent a letter to the FHA to underscore NAR’s desire to see more private flood insurance options available in the marketplace.

“NAR members can provide numerous examples where the market has offered better coverage at lower costs than the NFIP, but the [FHA’s] 1999 rule needlessly constrained consumer choice and created inequities between FHA and more conventional loan holders,” Malta notes. “The 21-year-old rule must be updated to reflect current market realities or the FHA risks losing market share.”

Dana Wade, the FHA’s assistant secretary for housing and federal housing commissioner, said the proposal will expand consumers’ options and no longer lock borrowers into one federal option without any ability to comparison-shop. “We are also proposing important safeguards that will help protect borrowers, so their homes will have flood insurance coverage at a level at or above the level available through the National Flood Insurance Program,” Wade said in a statement.

The FHA is currently seeking public comment over the proposal’s compliance aid for private flood insurance. Lenders could rely on the compliance aid to determine if a private insurance flood policy meets the FHA’s requirements.

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