Florida’s Proposed Mortgage Only Insurance Law Is Illegal

The Insurance Journal article, Florida Bill Would Require Option of Policies That Cover Only Unpaid Mortgage Amount, noted that:

House Bill 809 and its companion, Senate Bill 1070, would require insurance companies to offer HO policies that cover only the unpaid principal on a mortgage. Such a move would satisfy mortgage company requirements that protect the loan but could conceivably trim premiums that are usually based on full coverage and the replacement value of a home.

The first problem is that it is illegal and may place policyholders in default of their mortgage covenants regarding the amount of insurance that has to be purchased.

Fannie Mae and Freddie Mac backed mortgages have the following requirement:

The minimum required property insurance coverage amount for a first mortgage secured by a one- to four-unit property must be equal to the lesser of:

100% of the replacement cost value of the improvements, or

the unpaid principal balance of the loan, provided it equals no less than 80% of the replacement cost value of the improvements.

The lender or servicer must verify the coverage amount is not less than the minimum required as described above, and the verification source may be the property insurer, an independent insurance risk specialist, or other professional with appropriate resources to make such a determination.

If the coverage amount does not meet the minimum required, coverage that does provide the minimum required amount must be obtained.

A similar issue with prior Florida legislation was noted in Florida Senate Passes Insurance Bill That Will Make Mortgages Non-Negotiable Under Federal Regulations. The article noted:

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.

I have not agreed with insurance industry consultant Scott Johnson on many issues, but we are in agreement that this proposed law is bad public policy. The Insurance Journal article quoted Johnson:

The National Association of Insurance Commissioners has not seen similar legislation in other states, an official there said. And in Florida, the bill has met with some criticism.

‘Frankly, it’s very bad public policy to encourage people to buy this coverage,’ said Scott Johnson, an insurance educator and consultant in Florida. ‘There’s lot of additional work for both agents and carriers in making a required offer, there’s liability exposure for uncovered damages and possible E&O for the agent.’

And it’s not certain that a mortgage-only policy would save much on premiums, Johnson and Burand agreed. Proponents of the bill may suggest that, if a home is valued at $300,000 but has only $150,000 left on the mortgage, for example, then a mortgage-only insurance policy would surely slash premiums, right?

Not necessarily. Most HO policies include liability, law and ordinance and other coverage. Premiums for those items can help cover property losses for an insurer. Without economies of scale, carriers still have fixed costs and may have to charge a little more than might be expected for mortgage-only policies, the consultants said.

‘I would never tell someone to consider this coverage option,’ Johnson added. ‘It’s like sleeping in the park to save on rent.’

Florida’s insurance marketplace is in a mess partly because the insurance industry lobbyists have been suggesting and helping pass laws that help only insurers in the short term. Trying to fix the current outrageous rates by putting lipstick on a pig’s face is not a long-term solution.

Thought For The Day

In the insurance business, there is no statute of limitation on stupidity.

—Warren Buffett