Mortgage servicers, banks, and their accountants must sign off under federal regulations that the loans that they package and are underwritten by Fannie Mae comply with certain requirements, including those involving insurance. If the mortgage does not have the proper insurance, it cannot be part of the Fannie Mae backed system. The Florida Senate passed insurance legislation which clearly jeopardizes the chances of home ownership by Floridians with a Fannie Mae mortgage because it is non-compliant. Worse is that when many Floridians buy that type of non-compliant insurance, they may have the additional burden and expense of the mortgage servicer adding force-placed coverage.

Here is what Fannie Mae says about insurance, which every policyholder must have if they have a mortgage:

Property insurance for properties securing loans delivered to Fannie Mae must protect against loss or damage from fire and other hazards covered by the standard extended coverage endorsement. The coverage must provide for claims to be settled on a replacement cost basis. Extended coverage must include, at a minimum, wind, civil commotion (including riots), smoke, hail, and damages caused by aircraft, vehicle, or explosion. Typhoon coverage is required for security properties located in Guam.

Fannie Mae does not accept property insurance policies that limit or exclude from coverage (in whole or in part) windstorm, hurricane, hail damages, or any other perils that normally are included under an extended coverage endorsement.

Lenders should advise borrowers that they may not obtain property insurance policies that include such limitations or exclusions, unless they are able to obtain a separate policy or endorsement from another commercial insurer that provides adequate coverage for the limited or excluded peril or from an insurance pool that the state has established to cover the limitations or exclusions.

For a first mortgage secured by a property on which an individually held insurance policy is maintained, Fannie Mae requires coverage equal to the lesser of the following:

1. 100% of the insurable value of the improvements, as established by the property insurer; or

2. the unpaid principal balance of the mortgage, as long as it at least equals the minimum amount—80% of the insurable value of the improvements—required to compensate for damage or loss on a replacement cost basis. If it does not, then coverage that does provide the minimum required amount must be obtained.

The maximum allowable deductible for insurance covering a property (including common elements in a PUD, condo, or co-op project) securing a first mortgage loan is 5% of the face amount of the policy. When a policy provides for a separate wind-loss deductible (either in the policy itself or in a separate endorsement), that deductible must be no greater than 5% of the face amount of the policy.1

The Florida insurance industry and their lobbyists know about these laws. They have duped Florida’s politicians again by not fully explaining that the Senate bill will create a huge mess for Floridians. The Senate legislation allows Florida insurance companies to sell non-compliant insurance that will insure roofs on a non-replacement cost basis. Any Florida insurance agent who sells such a policy that does not pay full replacement costs and is listing a mortgagee on the policy should be sued for knowingly selling a non-compliant insurance policy.

This Senate legislation harms policyholders and those with legitimate claims that are getting the run around from their own insurance company, as discussed in, Do Not Believe Florida’s Insurance Industry That Laws Will Reduce Rates When Rates Often Depend Upon Mother Nature and Reinsurance Rates.
1 Fannie Mae Selling Guide, published April 7, 2021.