Learning Clip - Prop and Flood Ins Deductible

Freddie Mac – Revised Property and Flood Insurance Deductibles for Mortgages

Revised Property and Flood Insurance Deductibles

To All Freddie Mac Sellers and Servicers

This learning clip addresses
REVISED PROPERTY and FLOOD INSURANCE DEDUCTIBLES for MORTGAGES SOLD to and SERVICED for FREDDIE MAC

To help more Borrowers qualify for access to lower Mortgage rates through the Mortgages sold to and serviced for Freddie Mac, we have revised our property and flood insurance deductible requirements. These changes are in response to Seller/Serviced requests, changes in the market, and recent costly natural disasters. The insurance deductibles have changed for 1- to 4-unit properties, Planned Unit Development (PUDs), ground lease communities and condominiums.

For 1- to 4-unit properties, the deductible for fire, water (not caused by flooding) or wind loss may not exceed five percent of the limit maintained for dwelling coverage. This means the deductible must be 5 percent or less of the amount of insurance coverage on the home.

If there is a single deductible under a Borrower’s homeowner policy for all of these perils, then the deductible for that policy is subject to the 5 percent limitation.
If there are separate deductibles for each of these perils, then each deductible must be 5 percent or less.
This replaces our prior requirement that the deductibles for:

Windstorm or hail losses - be no higher than the greater amount of either $2,000 or 2percent of the policy's insurance limit, or

All other covered losses - be no higher than the greater amount of either $1,000 or 1 percent of the policy's insurance limit.
At a minimum, the insurable improvements on the Mortgaged Premises must be insured for loss or damage from fire, lightening and other perils (windstorm, hail, explosion, riot, civil commotion, damage by aircraft, damage by vehicles and damage by smoke) covered within the scope of standard extended coverage. The insurance limits must at least equal the higher of:

The unpaid principal balance of the Mortgage* up to 100 percent of the replacement cost of the insurable improvements (*for a Second Mortgage or Home Improvement Loan (HIL), the aggregate unpaid balance of the Second Mortgage/HIL and all outstanding superior liens on the Mortgaged Premises)
80 percent of the full replacement cost of the insurable improvements.

The Seller/Servicer must ensure adequate insurance coverage is in force even when the improvements are vacant or unoccupied.

Section 58.2 in the Single-Family Seller/Servicer Guide (Guide) identifies the perils we expect to be included in extended coverage, which is the minimum insurance coverage we require, in addition to fire coverage. These perils excluded from the primary insurance policy must be picked up through a secondary insurance policy such as a state insurance pool.

For PUDs, ground lease communities, and condominiums, there may be a separate deductible for fire, water (not caused by flooding) or wind loss and each such deductible may not exceed five percent of the limit maintained for building coverage. If there is a single deductible for all of these perils, that deductible is subject to the five percent limitation.

Freddie Mac no longer requires that there be a single, all-risk deductible prefunded by reserves that is equal to the lower of $10,000 or one percent of the building coverage limit.
If the individual units are covered by insurance purchased by their respective owners or leasehold lessees, the PUD homeowners association or the fee simple landowner/lessor of the ground lease community must maintain “all risk” coverage for common areas and property for 100 percent of their insurable value and provide for loss or damage settlement on a replacement cost basis. The association or fee simple landowner/lessor must also obtain any additional coverage commonly required by private Mortgage investors for developments similar in construction, location and use, including the following where applicable and available: Agreed amount, Demolition cost, Increased cost of construction, and Boiler and machinery.

For condominiums, the deductible under a condominium association’s flood insurance policy may not exceed the maximum deductible amount currently allowed under the National Flood Insurance Program (NFIP).

We no longer allow the flood insurance deductible to be as high as the amount stated in the association prefund by deductible-dedicated reserves or any other financing method which is governing documents.
The condominium owners association must maintain blanket “all risk” coverage for the following: General and limited common elements within the Condominium Project, Fixtures, machinery, equipment and supplies maintained for the service of the Condominium Project, and Fixtures, improvements, alterations and equipment within the individual Condominium Units.

Coverage must be for 100 percent of the insurable value of the common elements or property described above and provide for loss or damage settlement on a replacement cost basis.

The additional coverages required of PUD homeowners associations are also required of condominium owners associations where applicable and available.

The insurance requirements set forth in the Guide, as modified by the May and August 2006 Bulletins (reflected in this learning clip), must be met at the time a Mortgage is sold to Freddie Mac and continually thereafter for as long as Freddie Mac owns an interest in the Mortgage.

The changes in the May and August 2006 Bulletins affect Guide Chapter 58.

We encourage our Seller/Servicers to work with Borrowers to ensure that they fully understand their options and the effect of deductibles on their potential insurance recoveries.

For answers to questions about the requirements contained in the May and August 2006 Bulletins (reflected in this learning clip), Freddie Mac Seller/Servicers should call their Freddie Mac Account Manager or (800) FREDDIE.