The U.S. Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), will allow homeowners with FHA-insured mortgage financing to obtain flood insurance policies from private providers, so long as it confirms to FHA requirements.
“Today, HUD is increasing the flood insurance choices available to individuals and families with FHA-insured loans in areas that FEMA has designated to be at special risk for flooding,” HUD Secretary Marcia Fudge said in a release. “Flood insurance is required to ensure families and individuals are prepared if disaster strikes. Increasing consumer options for this important protection is one way we are building more resilient communities in the face of climate change.”
The final rule, effective Dec. 21, 2022, provides implementation guidance for FHA-approved lenders. FHA will require detailed flood insurance coverage information from lenders when they electronically submit mortgages for FHA insurance, the agency stated. The information is an objective included in HUD’s Climate Action Plan and will allow FHA to better analyze flood insurance details on mortgages in its portfolio at a more granular level than previously possible.
“The National Association of Realtors [NAR] applauds HUD for issuing the FHA final rule opening the door to private market flood insurance options in addition to the National Flood Insurance Program,” NAR President Kenny Parcell said. “The new rule is a victory for consumers, for choice, and for flood coverage that will protect more borrowers and property from the number one natural disaster in the United States. NAR has long advocated for an updated rule to address an inequality with conventional borrowers, and this action will increase the flood insurance choices available to FHA borrowers.”
Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit said his organization has been a longtime advocate for the action and commends the agency.
“The increasing threat of flood damage in many areas poses a significant risk to both homeowners and the FHA program,” Broeksmit said. “Accepting private flood insurance shifts some of the risk to the private market, ultimately helping to protect FHA’s Mutual Mortgage Insurance Fund.
“Although the final rule is a win for FHA borrowers, there is some concern that the lack of complete alignment with federal flood insurance requirements may lead to the rejection of some flood policies on FHA loans that are acceptable for other federally-backed loans,” he continued. “MBA will continue to work with HUD on improvements to housing policies and regulations that benefit borrowers while maintaining the safety and soundness of the FHA program.”
FHA requires insured mortgages for properties Federal Emergency Management Agency (FEMA)-designated Special Flood Hazard Areas have flood insurance. Prior to the new rule, this insurance could only be obtained through the National Flood Insurance Program and provided limited choices for consumers.
“We know borrowers face affordability challenges right now, yet a flood can be devastating to a family who is not properly insured,” Federal Housing Commissioner Julia Gordon said. “The choice to select a private flood insurance option may enable some borrowers to obtain policies that are less expensive or provide enhanced coverage.”