With the change, appraisers are required to note the The minimum amount of flood insura family properties, individual PUD unite condominium units is the lower of the minimum amount required trance in place as revises ita floodned to be in a Sce within a few months after we purchase the mortgage. Additional reviews, such as reviews of loans that become early payment defaults or foreclosures, take place when the default or foreclosure occurs. The regional offices use several different methods to monitor compliance with our flood insurance requirements through the underwriting review process. Compliance checks include methods such as checking the HUD-1 settlement statement when the appraisal indicates that the property is in a floodplain to see if flood insurance coverage was paid for at closing and that a renewal premium is included as part of the escrow deposits. Another method involves appraisal field reviews that we have performed by appraisers that we select. The review appraiser checks the accuracy of the original appraisal report. The review appraisal includes a specific request for the reviewer to check the accuracy of the flood hazard area determination made by the original appraiser. If our spot-check appraisal indicates that the property is located in a flood zone, but the original appraisal did not so indicate, we will require the lender to ensure that appropriate insurance coverage is obtained. Generally, we take the following actions based on the results of our underwriting reviews. If our review shows that the original appraisal determined that the property is located in a flood zone, the reviewer requires the lender to provide evidence of flood insurance. If the lender did not obtain the required flood insurance, the regional office will ask the lender to obtain the flood insurance. If the lender fails to supply the required coverage, the lender must repurchase the loan from Fannie Mae. In addition to our mortgage underwriting reviews, lender compliance for flood insurance is also a component of our lender operational reviews. We do periodic onsite assessments of our lenders' mortgage servicing operation. The assessment includes a review of whether proper procedures are in place to ensure the maintenance of hazard insurance and, when required, flood insurance. Servicing Requirements Fannie Mae requires its lenders to monitor on an ongoing basis any changes in Special Flood Hazard Areas. If, during the normal course of business, a lender discovers that the redefinition of a floodplain has resulted in the property improvements being included in a flood zone, the lender must notify the mortgagor to obtain coverage against possible damage. Fannie Mae also reminds servicers of the requirement for flood insurance as circumstances warrant. For example, in 1990 we notified servicers that FEMA maps of the Sacramento area had been redrawn and reminded them to notify borrowers of the need to obtain flood insurance. Periodically Fannie Mae revises its guidelines, including requirements concerning flood insurance where necessary. A recent revision clarified that floods are one of the hazards against which lenders could require borrowers to insure. Our requirements in this regard go beyond the Federal statute. Fannie Mae's Experience With Flood Losses Over the past several years, our internal review procedures for acquired properties have revealed only three properties affected by flood damage, and in only one case was lack of flood insurance the cause of a loss. That case involved a mortgage that had been included in a servicing transfer that we initiated. Since the new servicer was not able to confirm. whether flood insurance coverage was in effect, we absorbed the loss. CURRENT STATUTORY REQUIREMENTS Fannie Mae's flood insurance guidelines complement the statutory_requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, and related regulations. These Federal laws require banking and thrift institutions to determine that a borrower has secured flood insurance prior to making, increasing, extending or renewing a loan secured by improved real estate in a flood hazard area, if a flood hazard map has been published for the community in which the property is located, and if the community in which the area is located participates in the National Flood Insurance Program. Congress initially enacted the flood insurance measures to reduce Federal expenses for disaster assistance, to promote prudent development of flood hazard areas, and to prevent banking institutions from making loans secured by real estate with a potential for flood loss. If property securing the loan is in a flood hazard area, the bank or thrift must notify the borrower that the property is in that area and indicate whether related flood Federal disaster relief assistance is available. Banks and thrifts must maintain records that demonstrate compliance with the Acts and the implementing regulations. The statutes mandate enforcement by the primary supervisor of each banking or other covered lending institution. Freddie Mac implements these flood insurance requirements in the same manner as other important underwriting requirements. These implementing procedures are detailed in our Sellers' and Servicers' Guide, which require sellers to collect and verify property information, including whether or not flood insurance is needed and that it is in force where required. The description of the requirements regarding flood insurance presented here is very abbreviated. Our requirements are complex, extensive, and involve checks throughout the process of purchasing and servicing a loan. Singling out flood insurance for special treatment during this process could impose a significant burden on Freddie Mac, and yet not improve significantly the compliance level in the flood insurance program generally. Freddie Mac's underwriting and servicing requirements aim to verify that flood insurance is maintained throughout the life of the mortgage. In many cases, Freddie Mac's requirements exceed the requirements of Federal law. Freddie Mac's policy on flood insurance is as follows for each step in the life of a mortgage: • Mortgage Purchases. All properties must be appraised by qualified appraisers. The appraisal report accompanying each mortgage must identify whether the mortgaged property is located in an SFHA. If it is, the seller warrants to Freddie Mac that the property is covered by flood insurance that meets Freddie Mac's requirements for the life of the mortgage. Freddie Mac's flood insurance requirements exceed statutory requirements. As an example, we require that the insurance for a single family dwelling be for replacement cost or the maximum amount of insurance available for purchase from the NFIP, currently $185,000. The flood insurance coverage required by Freddie Mac is substantially greater than the amount of coverage currently required by law. We are pleased to note that S. 1405 would increase the amount of available coverage. • Mortgage Servicing. Similar to the warranty made by the seller of a mortgage to Freddie Mac, the servicer of such a mortgage warrants to us that a mortgaged property in an SFHA is covered, for the life of the mortgage, by flood insurance that meets our requirements. Once again, Freddie Mac's requirements exceed statutory requirements. We require flood insurance regardless of when FEMA determines that the property is in an SFHA, while the law requires it only if the property is in an SFHA at the time of loan purchase. For this reason, Freddie Mac requires the servicer, when aware that a community has been remapped into an SFHA, to inform all borrowers who had not been required to maintain flood insurance that they must now obtain flood insurance. • Servicing Transfers. When the current servicer ("transferor") sells the servicing of the mortgage to another servicer ("transferee"), the transferee becomes liable for all sale and servicing representations, covenants and warranties with respect to the transferred mortgages, whether or not the transferor had such liability. In the process of the transfer, the transferor must advise all applicable insurers including flood insurance providers and flood hazard determination services for mortgages subject to life-of-the-loan flood hazard determination contracts of the transfer. The transferor must also deliver to the transferee records for the transferred mortgages, including copies of transfer notices to property insurers (including flood insurers), copies of flood hazard determination service contracts (if any) and a list of mortgages showing expiration dates of insurance policies (including flood insurance policies) whether or not they are subject to escrow requirements. Within 30 days of the transfer, the transferee must certify to Freddie Mac that it possesses all funds and records pertaining to the transferred mortgages, and assumes responsibility and liability for the correctness of the records. • Evidence of Insurance. The servicer must maintain evidence of up-to-date flood insurance at all times. Quality Control In addition to flood insurance requirements enforced at important steps along the way, Freddie Mac policies require an ongoing quality control program. We require quality control to be performed by our seller/servicers and we also conduct quality control examinations ourselves. We require our seller/servicers to conduct quality control reviews of at least 10 percent of their home mortgage production, and they warrant to us that the sample reviewed is representative of their product line and loan origination process. Pursuant to Freddie Mac's quality control requirement, the flood insurance policy or certificate specifically must be reviewed. Of those mortgages selected for review, 10 percent must have a review appraisal or field review performed by an appraiser who is not affiliated with the original appraiser or appraisal firm. Flood exposure, if any, is confirmed by this review. Any findings, including but not limited to the issue of flood insurance, that raise questions as to the eligibility of the mortgage for sale to Freddie Mac must be reported to Freddie Mac in writing within 30 days. When notified of such noncompli ance, Freddie Mac can require the seller to repurchase or replace the defective mortgage or to indemnify Freddie Mac for any losses we suffer because of such deficiency. Frequent or severe cases of noncompliance may lead to the suspension of the seller. No incidences of noncompliance with our flood insurance requirements have been reported. A sampling last week by Freddie Mac of newly-originated loans shows the following findings for properties identified on an appraisal report as located in an SFHA: ⚫ flood insurance in force-83 percent • flood insurance waived by (a) survey, (b) recertification by flood hazard determination service, or (c) FEMA-13 percent ⚫ offsite loan files not retrieved in time to respond to sampling-4 percent • out of compliance-0 percent Seller/Servicer Annual Certification A further layer of control exists in Freddie Mac's annual certification requirement for seller/servicers. Within 90 days of its fiscal year-end, each seller/servicer must submit an Annual Eligibility Certification Report, in which the CEO or CFO certifies that the seller/servicer is in compliance with Freddie Mac's requirements, including the insurance and quality control requirements mentioned earlier. This certification must be accompanied by an Independent Public Accountant's ("IPA") report of (a) the procedures used for testing the seller/servicers' compliance with Freddie Mac requirements, and (b) the findings derived from such testing, which requires the IPA to audit 10 percent of the mortgages selected for quality control review. This annual certification has confirmed that there have been no reportable incidences of noncompliance with our flood insurance requirements. Freddie Mac Audits Freddie Mac's Institutional Audits and Investigations Unit performs on-site underwriting and servicing audits of seller/servicers. Included in these audits are procedures designed to give us assurances that seller/servicers have processes in place to identify mortgaged properties in SFHAS, and to respond to notices of flood zone changes. The seller/servicers examined are chosen on the basis of inadequate performance in one or more important areas. Since 1990, Freddie Mac has audited almost 500 institutions. These audits have produced an aggregate rate of 98 percent compliance with our flood insurance requirements. Additionally, a random sample review conducted last week of SFHA mortgages located in disaster counties of the nine Midwest States has produced the following compliance statistics: ⚫ flood insurance in force-50 percent • flood insurance waived because (a) appraisal shows property not in SFHA, (b) another flood hazard determination service shows property not in SFHA, or (c) loan originated prior to 1973 Act-48 percent • out of compliance-2 percent Follow-Up Guidance Freddie Mac recognizes that we are at risk if our seller/servicers do not comply with flood insurance requirements. We have put the extensive procedures outlined above in place to minimize this risk. These procedures are continually reinforced by special announcements, which have been tremendously successful in communicating with our seller/servicers. For example, the Federal Insurance Administrator thanked Freddie Mac for promoting NFIP's 1992 Spring Campaign, writing, “I hope to use your letter as inspiration for some of the other instrumentalities and agencies involved in the Program. . . . Your support over the years has been invaluable. If everyone followed through as you, we'd have eight million policies by now. I hope we continue this partnership for many years to come." S. 1405, THE NATIONAL FLOOD INSURANCE REFORM ACT OF 1993 As noted briefly above, Freddie Mac supports the effort to clarify and strengthen the flood insurance policies and requirements in the 1968 Act and the 1973 Act. We have, however, two major concerns with S. 1405 in its current form. Regulations by Office of Federal Housing Enterprise Oversight Section 201 would require the Director of the Office of Federal Housing Enterprise Oversight to issue regulations directing Freddie Mac to implement procedures reasonably designed to assure that all loans purchased by Freddie Mac that are se cured by properties in SFHAs are covered by flood insurance.1 As noted above, the 1973 Act already prohibits Freddie Mac from purchasing such mortgages unless they are covered by flood insurance. Section 201 ̊of the legislation would, therefore, not expand the scope of flood insurance coverage, but merely add a layer of regulation to existing statutory requirements. Freddie Mac believes that such regulation would be unnecessarily redundant and potentially burdensome. Freddie Mac purchases hundreds of thousands of mortgages each year, and we subject each to dozens of operational checks and procedures that together ensure that the mortgage meets our standards of quality and our statutory restrictions. The summary of our requirements regarding flood insurance discussed above illustrates the level of complexity and detail Freddie Mac requires of our seller/servicers in determining whether or not to purchase a particular mortgage. As important as flood insurance is, it must be considered as one of the many elements that Freddie Mac must account for in our day-to-day mortgage purchase activities. While the requirement for regulations may seem to be a minor addition considering the current statutory requirement, Freddie Mac is concerned that the inclusion of such a requirement would indicate Congressional concern with our existing practices and that because of this perception a diligent regulator will feel compelled to change those practices, without regard to our current level of compliance. Our recent surveys indicate such a high level of compliance that we believe regulations are unlikely to produce significant improvement. Further, to select flood insurance for special treatment could lead to increased costs for Freddie Mac, for our seller/ servicers, and ultimately for the American homebuyer. As we have stated throughout this testimony, we believe strongly that we have established that we are in compliance with and exceed the current legal requirements for flood insurance. We would respectfully ask that the subcommittee reconsider placing any additional regulatory burden on us. Post-Origination Authority Freddie Mac strongly supports the purpose of Section 204 of S. 1405: to confirm Congressional intent that lenders should be authorized to require borrowers to obtain flood insurance if the Director of FEMA classifies, at any time, the borrower's property as being in an SFHA. For years, Freddie Mac has gone beyond the minimum statutory requirements by also requiring that the institution servicing a loan require the borrower to obtain flood insurance if the property becomes reclassified during the term of the mortgage as being in an SFHA. This so-called "post-origination" authority is clearly in the public interest and makes good business sense. A property currently determined to be in an SFHA is at risk of flood damage, whether or not it was in an SFHA when the mortgage was originated. Unfortunately, there are some, including the District Attorney in Sacramento, California, who have claimed that lenders do not have the Federal statutory authority to require borrowers to obtain flood insurance if the SFHA is designated after the loan is originated. The uncertainty over the meaning of Federal law has resulted in a reluctance by lenders, who face the risk of litigation, to require borrowers to obtain flood insurance if it is discovered after the mortgage has been originated that the secured property is in an SFHA. In fact, in order to comply with the laws and Congressional intent, a clear legislative provision is necessary to grant lenders authority to enforce flood insurance coverage post-origination. Section 204 as written, however, might be interpreted so as not to achieve this goal. Freddie Mac has two technical suggestions for improving this section. First, the authority provided by this section only applies to mortgages that were originated by Federally-regulated lenders. This means that the post-origination authority would be unavailable for mortgages purchased by Freddie Mac from many institutions that are not Federally regulated. We suggest that this section be redrafted to provide post-origination authority to institutions servicing loans that have been purchased by Freddie Mac or Fannie Mae. Otherwise, many loans-including loans for which the existing law would have required flood insurance had the properties been in SFHAS at the time of loan origination-will not be covered. Second, Freddie Mac has an additional suggestion for clarification. As written, the provision might be construed by some to mean that lenders have the authority to place such insurance only if the properties were located in an SFHA at the time that the mortgages were originated, even though that is obviously not its intent. Language should be inserted into the provision making it clear that the authority granted to lenders applies regardless of when the Director of FEMA has identified an SFHA. 1 Requirements placed on Freddie Mac by the legislation would also, of course, be placed on Fannie Mae. |