The Federal Housing Administration (FHA) has published a proposed rule to allow a private flood insurance option when flood insurance is required.
Currently, homebuyers who take out an FHA loan and buy homes in high-risk flood areas are required to buy flood insurance. The only available option for that flood insurance is presently through the National Flood Insurance Program (NFIP), managed by the Federal Emergency Management Agency (FEMA).
This proposed change would allow lenders to accept private flood insurance policies for single-family FHA mortgages, potentially introducing lower costs into the flood insurance marketplace through competition.
“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,” said Joe Gormley, Deputy Assistant Secretary for Single Family Housing at the FHA. “Allowing participation by private insurers should generate the competition needed to ultimately reduce costs for consumers.”
“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,” said Assistant Secretary for Housing and Federal Housing Commissioner Dana Wade. “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.”
Those safeguards include the proposal of a compliance aid for private flood insurance policies, which would allow lenders to rely on the aid to verify that policies meet FHA requirements.
The FHA estimated that 3-5% of FHA borrowers could obtain a private flood insurance policy for their FHA loan if the option became available.
The FHA’s proposed rule will be published in the Federal Register shortly, and there will be a 60-day public comment period after its publication.
