Each borrower has the right to select his or her own insurance carrier to provide property insurance for the security property, provided that the insurance policy and coverage meet Fannie Mae's requirements. The lender must ensure that the insurance carrier, policy, and coverage meet Fannie Mae's requirements. In some cases, Fannie Mae may require additional coverage or consider coverage that differs from these requirements.
Unless Fannie Mae has approved alternative arrangements in advance, the property insurance policy for a property securing any first mortgage—including blanket policies for condo, co-op, and PUD projects—must be written by a carrier that meets the following rating requirements. The carrier needs to meet only one of the following rating categories, even if it is rated by more than one agency:
Carriers rated by the A.M. Best Company, Inc. must have either:
a “B” or better Financial Strength Rating in Best’s Insurance Reports or
an “A” or better Financial Strength Rating and a Financial Size Category of “VIII” or greater in Best’s Insurance Reports Non-US Edition.
Carriers providing coverage for co-op projects must have a general policyholder’s rating of “A’ and Financial Size Category of “V” in Best’s Insurance Reports.
Carriers rated by Demotech, Inc. must have an “A” or better rating in Demotech’s Hazard Insurance Financial Stability Ratings.
Carriers rated by Standard and Poor’s must have a “BBB” or better Insurer Financial Strength Rating in Standard and Poor’s Ratings Direct Insurance Service.
Fannie Mae also accepts the following property insurance policies:
policies underwritten by a state’s Fair Access to Insurance Requirements (FAIR) plan, if it is the only coverage that can be obtained;
policies obtained through state insurance plans—such as the Hawaii Property Insurance Association (HPIA), Florida’s Citizens Property Insurance Corporation, or other state-mandated windstorm and beach erosion insurance pools—if that is the only coverage that is available; and
a separate hurricane insurance policy issued by the Hawaiian Hurricane Relief Fund (for properties in Hawaii), as long as the companion noncatastrophic fire and extended coverage (or homeowner’s) policy is obtained from a property insurer that satisfies Fannie Mae’s rating criteria.
The following are exceptions to Fannie Mae’s rating requirements:
Second mortgages — The property insurance policy for a property that secures a second mortgage does not have to be written by an insurance carrier that meets Fannie Mae’s criteria, unless Fannie Mae has an interest in the first mortgage.
Mortgage impairment (or mortgagee interest) insurance — If the servicer is covered by mortgage impairment (or mortgagee interest) insurance, Fannie Mae does not require confirmation that the borrower’s property insurance coverage is with a firm that meets its rating requirements (although the lender should advise the borrower of Fannie Mae’s requirements when it originates the mortgage).
If Fannie Mae will rely on the servicer’s impairment policy that covers the loan or the property as a type of reinsurance arrangement, the issuer of the mortgage impairment (or mortgagee interest) policy must meet either one of the A.M. Best general policyholder’s ratings or one of the Standard and Poor’s claims-paying ability ratings listed previously.
Reinsurance arrangements — The policies of an insurer that does not meet Fannie Mae’s rating requirement will be accepted if the insurer is covered by reinsurance with a company that does meet either one of the A.M. Best general policyholder’s ratings or one of the Standard and Poor’s claims-paying ability ratings listed previously.
The primary insurer and the reinsuring company must be authorized (or licensed, if that is required) to transact business within the state where the property is located. The reinsurance agreement must have a “cut-through” endorsement that provides for the reinsurer to become immediately liable for 100% of any loss payable by the primary insurer in the event that the primary insurer becomes insolvent.
Both the primary insurer and the reinsuring company must execute an Assumption of Liability Endorsement(Fannie Mae Form 858) or any equivalent endorsement that provides for 100% reinsurance of the primary insurer’s policy and 90-day written notice of termination of the reinsurance arrangement. Form 858 (or the equivalent endorsement) must be attached to each insurance policy that is covered by the reinsurance agreement unless the servicer is covered by a mortgage impairment (or mortgagee interest) insurance policy.
A reinsurer can limit its coverage exposure by specifying a dollar limitation in the reinsurance endorsement. However, Fannie Mae will not accept a contract that allows contributions or assessments either to be made against Fannie Mae or to become a lien on the property that is superior to Fannie Mae’s lien. If the reinsurance endorsement includes a dollar limitation, the insurance written under the policy cannot exceed that amount.
The table below provides references to the Announcements that have been issued that are related to this topic.