Will the FHFA IG report lead to a crackdown on flood insurance?

The regulator and conservator for Fannie Mae and Freddie Mac agreed to strengthen flood insurance examination measures upon the recommendation of its general inspector.

The actions the Federal Housing Finance Agency agreed to come on the heels of an inspector general audit that found FHFA’s oversight of flood insurance for leveraged investors in government-linked mortgages was effective but not sufficiently enforced regularly and did not have some formal procedures.

The government watchdog’s report could bring more constant scrutiny to the many non-bank lenders and escrow providers that work with the businesses, as private mortgage firms are ultimately responsible for flood insurance compliance. and area bank regulators watched closely.

“Examination procedures were inconsistent for evaluating business oversight of vendor/servicers’ compliance with flood insurance requirements,” the Office of Inspector General said in a report on FHFA’s Department of Business Regulation released Thursday.

The report outlines three ways to fix the problem, all aimed at ensuring collateral coverage for single-family loans in special flood hazard areas. FHFA agreed with all three in its audit response.

The most immediate step FHFA has agreed to take by Nov. 22 is to provide “refresher training” on existing guidance involving loan sampling in examinations, but there are more significant longer-term steps.

The comptroller’s report calls for FHFA to institute “targeted review procedures to assess businesses’ oversight of flood service vendor compliance by June 30, 2025,” to address findings that there was a lack of specific guidance in the agency’s handbook for this.

The IG removed some of the other findings from its audit, such as the specific directives the Federal Housing Finance Agency found to Fannie and Freddie regarding flood insurance compliance.

One distinction in FHFA’s oversight of the two that the report divulges is that the agency specifically “did not document the sampling methodology for the selection of tested loan files and analyzes to support flood insurance at Freddie Mac” during the time the enterprise was audited. .

To remedy this, the regulator and business conservator agreed to “conduct review work to assess whether Freddie Mac has implemented procedures reasonably designed to ensure that its mortgage loans are in special flood risk areas covered by flood insurance until August 29, 2025.”

The inspector general audited FHFA between January and September of this year. The scope of the audit covered information provided by DER about its supervisory activities for Freddie Mac between 2018 and 2021. This included two review activities at Freddie Mac. For Fannie Mae, the scope of its audit covered DER’s supervisory activities from 2021 through January 31, 2024.

The government watchdog estimated that as of Dec. 31, 2023, 3.2 percent of Fannie’s single-family mortgages have liens in flood zones, and 2.9 percent of properties securing Freddie’s loans in that category are in SFHAs.

The challenges of flood insurance extend far beyond the responsibilities that mortgage companies, businesses, FHFA and its inspector general have to provide coverage in federally designated flood zones.

At the time of writing, authorization for the National Flood Insurance Program was set to expire on Sept. 30, and larger congressional budget negotiations have been strained by a partisan divide that election-year pressures have intensified.

Some speculation suggests that the fate of the NFIP could differ greatly depending on the outcome of the election.

Project 2025a conservative think-tank agenda contributed to by former President Trump’s allies — but rejected by the Republican nominee himself — suggests that, if elected, the NFIP could be dismantled. It also indicates that Fannie and Freddie could be bailed out by the conservator.

Instead, an option to address broader concerns with the price and availability of insurance in the real estate industry in a recent report proposed under the current Democratic administration would be to expand the NFIP to cover homeowners policies as well. This report also explores private market options.

Private coverage accounted for about a third of flood insurance, according to the report a study released last year. The unpredictable nature of costs associated with natural and other factors has recently led private insurers to exit certain high-risk areas.