Servicer Responsibilities Related to Property Insurance for First Lien Mortgage Loans

The servicer must ensure at all times that any required property insurance coverage is maintained to protect Fannie Mae’s interest in the mortgage loan. The following table lists the servicer’s responsibilities applicable to all first lien mortgage loans owned or securitized by Fannie Mae unless otherwise noted.

The servicer must...

Verify annually that the selected insurance carrier, policy amount and type of coverage meet Fannie Mae’s requirements.

Ensure requirements contained in any negotiated contract are met.

Ensure property insurance premiums are paid. See B-1-01, Administering an Escrow Account and Paying Expenses for additional information.

Immediately obtain new coverage to meet Fannie Mae’s requirements if the borrower allows the insurance coverage to lapse. See B-6-01, Lender-Placed Insurance Requirements for additional information.

Contact its Fannie Mae Servicing Representative (see F-4-03, List of Contacts) to determine if additional coverage is needed if the insurable improvements of the property securing a mortgage loan are exposed to hazards a fire and extended coverage policy does not protect against.

Change the insurance coverage for a mortgage loan when it is inadequate to protect Fannie Mae’s interests or, in the instance of lender-placed insurance, causes Fannie Mae to be overinsured. Examples include properties that become vacant and home renovation or construction mortgage loans where the renovation or construction work is completed or the borrower occupies the property. Also, see B-4-02, Builder’s Risk/Construction Site Insurance for additional information.

Servicer Responsibilities Related to Property Insurance for Second Lien Mortgage Loans

The following table lists the servicer’s responsibilities applicable to all second lien mortgage loans owned or securitized by Fannie Mae.

The servicer must...

Obtain and review a copy of the first lien mortgage loan insurance policy annually to determine if the insurance coverage meets Fannie Mae’s requirements.

Require the borrower to obtain appropriate endorsements that will bring the coverage in line with Fannie Mae’s requirements if the existing property insurance policy does not provide the amount of coverage Fannie Mae requires and send a copy of these endorsements to the servicer of the first-lien mortgage loan.

Ensure property insurance premiums are paid, see B-1-01, Administering an Escrow Account and Paying Expenses for additional information.
Obtain new coverage to meet Fannie Mae’s requirements if the borrower allows the insurance coverage to lapse. See B-6-01, Lender-Placed Insurance Requirements for additional information.

Property Insurance Policy and Coverage Requirements

The requirements of a property insurance policy for the insurable improvements of the property securing a mortgage loan are as follows:

  • The coverage must protect against loss or damage from fire, windstorm, hurricane, hail, and other hazards covered by the standard extended coverage endorsement.

  • If the property insurance policy includes such limitations and exclusions, the borrower must obtain a separate policy or endorsement from another insurer that provides adequate coverage for the limited or excluded peril.

  • The coverage must provide for claims to be settled on a replacement cost basis.

Also see B-2-02, Property Insurance Requirements for Mortgage Loans Secured by a One- to Four-Unit Property and B-2-03, Property Insurance Requirements for Mortgage Loans Secured by a Unit in a PUD, Condo, or Co-op for additional information.

Property Insurance Carrier Rating Requirements

The property insurance policy for the insurable improvements of the property securing any first lien mortgage loan must be written by a carrier that meets one of the following rating requirements, even if it is rated by more than one of the rating agencies.

Rating Agency Rating Category

A.M. Best Company, Inc.

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 a Financial Size Category of “V” in Best’s Insurance Reports.

Demotech, Inc.

“A” or better rating in Demotech’s Hazard Insurance Financial Stability Ratings.

Standard & Poor’s

“BBB” or better Insurer Financial Strength Rating in Standard & Poor’s Ratings Direct Insurance Service.

Exceptions to Property Insurance Carrier Rating Requirements

Fannie Mae continues to accept property insurance policies from State Farm Florida Insurance Company although the company’s A.M. Best Company, Inc. financial strength rating does not meet Fannie Mae’s rating requirements.

Fannie Mae accepts the following types of property insurance policies if it is the only coverage the borrower can obtain:

  • policies underwritten by a state’s FAIR plan, and

  • policies obtained through state or territory insurance plans.

The following are exceptions to Fannie Mae’s rating requirements:

  • Mortgage Impairment (or Mortgagee Interest) Insurance - If the servicer is covered by a mortgage impairment (or mortgagee interest) insurance policy, and the issuer meets either the A.M. Best Financial Strength Rating or Standard & Poor’s Insurer Financial Strength Rating, Fannie Mae does not require the servicer to confirm the borrower’s property insurance coverage is with a firm that meets Fannie Mae’s rating requirements.

  • Reinsurance Arrangements - The policies of an insurer that does not meet Fannie Mae’s rating requirements will be accepted provided all conditions outlined in the following table are met.

Conditions for acceptable reinsurance arrangements

The insurer is covered by reinsurance with a company that meets either one of the A.M. Best Financial Strength Ratings or Standard & Poor’s Insurer Financial Strength Rating, as listed in Property Insurance Carrier Rating Requirements.

The primary insurer and the reinsuring company are authorized (or licensed, if required) to transact business within the state where the property is located.

The reinsurance agreement has 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 the primary insurer becomes insolvent.

Both the primary insurer and the reinsuring company execute an Assumption of Liability Endorsement (Form 858), or any equivalent endorsement that provides for 100% reinsurance of the primary insurer’s policy and a 90-day written notice to Fannie Mae of the termination of the reinsurance arrangement.

Note: Form 858 (or the equivalent endorsement) must be attached to each insurance policy covered by the reinsurance agreement, unless the servicer is covered by a mortgage impairment (or mortgagee interest) insurance policy.

The reinsurance agreement does not allow 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.

Evidencing Acceptable Property Insurance

The following is acceptable evidence of property insurance:

  • the original insurance policy or a short form certificate of insurance showing all of the necessary information and signed by the insurer, or

  • data files including sufficient information about the insurance policy, the property, and the borrower, provided the following requirements are met:

    • The data file is equivalent to a printed policy and includes sufficient information to evidence compliance with Fannie Mae’s requirements.

    • The servicer’s errors and omissions insurance policy acknowledges electronic data transfers and fully protects the servicer and Fannie Mae against losses resulting from erroneous data files or transfers.

    • The servicer can produce legible hard copies of the insurance policies and proof of premium payments to Fannie Mae upon request.