After years of legislative back-and-forth about the National Flood Insurance Program, the U.S. Department of Housing and Urban Development is working to make worries about the program a thing of the past for homebuyers with Federal Housing Administration-insured mortgages.
HUD has filed a proposal to allow homebuyers with FHA-insured mortgages to purchase private mortgage insurance, instead of being forced to purchase insurance through the NFIP, according to an announcement Wednesday.
“Our proposal would expand the options for obtaining flood insurance, rather than continuing to lock in borrowers to one federal option without any ability to comparison shop,” Housing Assistant Secretary and Federal Housing Commissioner Dana Wade said. “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.”
The 22-page proposal calls on the Federal Housing Administration to allow homebuyers who purchase single-family homes in Federal Emergency Management Agency-designated Special Flood Hazard Areas (SFHA) to purchase private flood insurance that would protect homebuyers from a lapse in the NFIP and possibly lower flood insurance costs through increased competition.
“In the event of a lapse in the NFIP, the option of private flood insurance may reduce the likelihood of delays in the processing of new originations,” the proposal read. “Acceptance of private flood insurance policies would additionally benefit borrowers who want FHA-insured mortgages, by providing them consumer choice, including the opportunity to obtain private flood insurance policies that may be more affordable than NFIP policies.”
“Overall, this proposed rule would promote consistency with industry standards and reduce the regulatory restrictions on flood insurance for FHA-insured loans,” it added. “HUD believes that this proposed rule would harmonize FHA policies with the Congressional intent to encourage an expanded private flood insurance market, as expressed in the Biggert-Waters Act.”
The proposal also suggests establishing a compliance aid for private flood insurance policies to ensure these policies meet FHA standards and requirements for homes within FEMA’s SFHA areas. The aid would also determine guidelines for the cancellation or non-renewal of private flood insurance policies and require clauses that explain homebuyer options under the NFIP.
If the proposal passes, HUD estimates that upwards of five percent of FHA borrowers will opt to purchase private flood insurance.
“This proposal will remove yet another unnecessary regulatory barrier to doing business with FHA and can also reduce costs to the federal government-costs that are ultimately born by the taxpayer,” Single-Family Housing Deputy Assistant Secretary Joe Gormley said in a written statement. “Allowing participation by private insurers should generate the competition needed to ultimately reduce costs for consumers.”
The National Association of Realtors supported HUD’s proposal, with NAR President Vince Malta echoing Gormley’s statements about increased affordability.
“America’s 1.4 million Realtors are grateful to see the FHA take steps to make more private flood insurance options available to U.S. consumers,” Malta said. “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.”
“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,” he added.
HUD will publish the proposal in the Federal Register and open a 60-day period for public comment before moving forward on the change.
Read the full proposal below: