Will FHFA IG’s report lead to a flood insurance crackdown?

The
regulator
and
conservator
for
Fannie
Mae
and
Freddie
Mac
has
agreed
to
beef
up


flood
insurance
examination
measures
at
the
recommendation
of
its
inspector
general.

The
actions
the
Federal
Housing
Finance
Agency
agreed
to
come
as
a
result
of
an
inspector
general
audit,
which
found
the
FHFA’s
flood
insurance
oversight
for
the
influential
government-related
mortgage
investors
was
effective
but
not
applied
regularly
enough
and
lacked
some
formal
procedures.

The
government
watchdog’s
report
could
bring
more
constant
scrutiny
to
the
many
depository
and
nonbank
lenders
and
servicers
that
work
with
the
enterprises
because
private
mortgage
firms
ultimately
are
responsible
for
flood
insurance
compliance,


an
area
bank
regulators
have
been
watching
closely
too. 

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

The
report
lays
out
three
ways
to
rectify
the
concern,
all
of
which
are
aimed
at
ensuring
that
there’s
coverage
for
single-family
loan
collateral
in
special
flood
hazard
areas.
The
FHFA
agreed
to
all
three
in
its
response
to
the
audit.

The
most
immediate
step
the
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
long-term
steps.

The
watchdog’s
report
calls
for
the
FHFA
to
institute “targeted
examination
procedures
to
assess
the
enterprises’
oversight
of
seller-servicers’
flood
compliance
by
June
30,
2025”
in
order
to
address
findings
that
there
was
a
lack
of
specific
guidance
in
the
agency’s
manual
for
this.

The
IG
redacted
some
of
the
other
findings
from
its
audit
like
specific
directives
it
found
the
Federal
Housing
Finance
Agency
gave
to
Fannie
and
Freddie
regarding
flood
insurance
compliance.

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

To
rectify
this,
the
enterprises’
regulator
and
conservator
agreed
to “conduct
an
examination
activity
to
assess
whether
Freddie
Mac
has
implemented
procedures
reasonably
designed
to
ensure
that
its
mortgage
loans
are
in
special
flood
hazard
areas
covered
by
flood
insurance
by
Aug.
29,
2025.”

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

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

Flood
insurance
challenges
extend
far
beyond
the
responsibilities
mortgage
companies,
the
enterprises,
the
FHFA
and
its
inspector
general
have
for
ensuring
coverage
in
federally
designated
flood
zones.

At
the
time
of
this
writing,
authorization
for
the
National
Flood
Insurance
Program
was
due
to
expire
Sept.
30,
and
larger
congressional
budget
negotiations
were
tense
due
to
a
partisan
divide
that
election
year
pressures
have
intensified.

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

Project
2025,
a
conservative
think-tank
agenda
that
allies
of
former
President
Trump
contributed
to
—
but
which
the
Republican
candidate
himself
has
disclaimed
—
suggest
that
if
he
were
elected,
the
NFIP
could
be
disbanded.
It
also
indicates
Fannie
and
Freddie
could
be
freed
from
conservatorship.

In
contrast,
one
option
for
addressing
broader
concerns
with
the
price
and
availability
of
insurance
in
the
housing
industry
in


a
recent
report
put
forth
under
the
current
Democratic
administration
would
be
to
expand
NFIP
to
also
cover
homeowner
policies.
That
report
also
explores
private
market
options.

Private
coverage
accounted
for
about
one-third
of
flood
insurance,
according
to


a
study
released
last
year.
The
unpredictable
nature
of
costs
associated
with
natural
and
other
factors
recently
have
led
private
insurers
to
exit
some
high
risk
areas.