Private flood insurance bill has detractors from the mortgage industry

Private flood insurance bill has detractors from the mortgage industry

Private flood insurance bill has detractors from the mortgage industry A widely industry-backed private flood insurance bill is encountering resistance from another corner of the financial services sector.

Government-sponsored mortgage companies Fannie Mae and Freddie Mac are concerned that the Flood Insurance Market Parity and Modernization Act – which would clarify existing statutes allowing the businesses to accept private flood coverage from surplus lines carriers – could increase losses, a Government Accountability Office said.

Specifically, the bill would “weaken its risk-management practices to the extent that it would impair Fannie Mae from maintaining or taking prudent actions to protect homeowners and collateral,” Fannie officials told GAO auditors.

Freddie officials agreed, saying that while creating a strong private flood market is essential, the “legislation could shift the risk of flood loss to Freddie Mac.”

The mortgage companies are specifically concerned that by turning over authority on private flood insurance to state insurance regulators, they would lose their ability to protect against “inadequate flood insurance coverage on properties that are used as collateral” for loans, explained Anne Canfield of the Consumer Mortgage Coalition.

The bill would also limit Fannie and Freddie’s ability to require that private flood insurers are solvent and able to pay claims. They would also need to accept coverage with high deductible and exclusions, leading to a greater likelihood that homeowners would lose their policy after a serious flood.

Fannie and Freddie “need to be able to require appropriate flood insurance with reasonable deductibles,” Canfield said during Senate hearings on the bill.

Meanwhile, surplus lines insurance companies have maintained their superior financial performance makes them just as qualified to fulfill the requirement for coverage on homes purchased through federally-backed mortgage loans.

An A.M. Best report even suggested that continuing to rely only on federally subsidized plans through the National Flood Insurance Program is “insufficient.”

“The NFIP was not designed to accommodate major catastrophes,” the group said. “However, federal taxpayers are shouldering the substantial burden of the program’s deficit, largely attributable to losses from Hurricanes Katrina, Rita and Wilma in 2005, and Superstorm Sandy in 2012.”

The passage of the flood insurance legislation, then, is a “big step in the right direction” for a more robust, affordable market for flood insurance.

The bill was passed in the House without opposition in April, and awaits consideration in the Senate.

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