Freddie Mac Realigns Insurance Underwriting Rules to Match Current Industry Practices
Borrowers who choose to pay higher homeowners insurance deductibles, or are forced into them by shell-shocked insurance carriers, will soon qualify once again for low-rate conventional mortgages, according to columnist Lew Sichelman of the Realty Times.
In July, Freddie Mac will realign its underwriting rules to match current insurance industry practices by increasing the maximum deductible allowed from 2 percent to 5 percent for fire, water and wind coverage for one-to-four-unit properties, condos and planned unit developments.
The change, company officials said at the Mortgage Bankers Association’s National Secondary Market Conference in Chicago last week, is designed to help borrowers cope with higher insurance costs in general — but higher deductibles in particular.
Sunshine State Lenders use Freddie Mac and other secondary mortgage outlets to replenish their supplies of cash for Florida home loans. The company and others, including Fannie Mae, buy loans from primary lenders, package them into securities and sell them to investors throughout the world.
Not every lender sells its loans on the secondary market. But most of them do, and Freddie Mac and Fannie Mae are the nation’s biggest buyers. As a result, the rules set down by the two government sponsored enterprises are followed by practically every entity which originates home loans under the federally mandated ceiling of $417,000.
Fannie Mae and Freddie Mac operate in the “conventional” Florida home loan market, where rates are generally 0.25-0.50 percent lower than other mortgages. As a result of the severe hurricanes along the Gulf Coast and Florida, most insurers have raised their minium deductible to 5 percent, an automatic “disqualifier” under Freddie Mac’s current guidelines.
Borrowers have always had the option of choosing a higher deductible to save money on Florida insurance, but the mandatory increase instituted by some carriers has set a new floor beyond what Freddie Mac currently finds acceptable. Consequently, a Florida home loan on many coastal properties has become unsaleable, at least as far as Freddie Mac is concerned.
The ongoing Florida property insurance debate is evidence of how complex this can get. By acknowledging the change in insurance company practices, Freddie Mac is making sure borrowers have access to both lower rates and lower insurance premiums, company officials said. The current rules defeat the purpose of higher deductibles, the company believes.
“Anyone who tries to take advantage of lower insurance rates pays for it in higher mortgage rates,” said James Cotton, Vice President of mortgage sourcing.
The entire Gulf Coast is still sorting things out after Hurricane Katrina. A report by the State of Florida showed that the annual premium savings from one major carrier by going from a 2 percent to 5 percent deductible on a $150,000 house varies by location. In Miami, the savings amounted to $394. It was just $48 in Jacksonville and $110 in Orlando. In Pensacola and Tampa, savings came out to $248 and $218, respectively.
The change is “especially important” in the Florida condo market, Cotton said, because the choice of a higher deductible is often the decision of the homeowners association, not of its individual owners. Obviously, insurance is a big deal anywhere. But when you’re in the market for a Florida home loan it can represent a huge difference in cost. Know what you’re getting into!
