WASHINGTON — A private flood insurance bill passed by the House is making Fannie Mae and Freddie Mac uneasy because they fear it could lead to greater losses, according to a recent report by the Government Accountability Office.
The Flood Insurance Market Parity and Modernization Act, which would open the door for the government-sponsored enterprises to accept private flood insurance on single-family mortgage, was approved by a 419-0 vote in April. Currently, the GSEs rely solely on flood insurance policies backed by the Federal Emergency Management Agency.
Fannie officials told GAO auditors the bill would "weaken its risk-management practices to the extent that it would impair Fannie Mae from maintaining or taking prudent actions to protect homeowners and collateral."
Freddie officials, meanwhile, agreed that the creation of a viable private flood insurance market is important, but warned that the proposed "legislation could shift the risk of flood loss to Freddie Mac," according to the GAO.
The bill would allow homeowners insured by the National Flood Insurance Program to switch to a private flood policy and retain the right to get their NFIP policy back again if they are dissatisfied with private insurance.
The legislation would essentially grandfather a homeowner's federal flood insurance rate provided there is no lapse in insurance coverage.
The flood insurance bill would also clarify that state insurance regulators have the same authority and discretion to regulate private flood insurance as they have to regulate other insurance products and markets.
Some observers agreed that Fannie and Freddie have a right to be worried.
The bill would prohibit the GSEs from "taking reasonable steps to protect against inadequate flood insurance coverage on properties that are used as collateral" for agency-backed loans, said Anne Canfield, executive director of the Consumer Mortgage Coalition.
The legislation would limit the ability of the GSEs to require that private flood insurers are solvent and able to pay claims.
In addition, the GSEs would be required to accept private flood insurance with high deductibles and exclusions that could result in a loss in the case of a serious flood. Currently the GSEs and their servicers can require private flood insurance that provides coverage as least as broad as an NFIP policy.
The GSEs and "servicers need to be able to require appropriate flood insurance with reasonable deductibles," Canfield said before the Senate Small Business Committee on June 30.
"Congress can encourage more private flood insurance while retaining the several protections that the GSEs and their servicers use to ensure that insurance coverage is appropriate, that claims are paid, and that properties are repaired after a flood," Canfield said.
Meanwhile, the GAO has recommended that FEMA revoke its policy that discourages NFIP policyholders from switching to private flood insurance policies. FEMA agreed with the GAO.
FEMA used to allow insured homeowners to cancel their federal flood insurance policy and get a refund if they obtained a private flood insurance policy.
On Nov. 1, 2015, FEMA stopped paying refunds to policyholders who canceled their private flood insurance policies, according to a July 14 GAO report titled "Potential Barriers Cited to Increase Use of Private Insurance."
"GAO recommends that FEMA reconsider allowing policyholders who cancel their NFIP policy to be refunded, on a prorated basis, when obtaining a non-NFIP policy and take any necessary steps to amend the NFIP standard policy to do so. FEMA agreed with our recommendation," the GAO said.