Selling Guide

Published December 16, 2020

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B7-3-05, Additional Insurance Coverage (12/16/2020)

Introduction

This topic contains information on additional property insurance coverage, including:


Additional Property Insurance Coverage

If a lender believes that a security property is exposed to hazards that fire and extended coverage do not protect against—such as toxic waste—it should contact Fannie Mae to determine whether additional coverage is necessary.


Builder’s Risk Insurance

When Fannie Mae purchases—under terms permitting—a mortgage that combines construction and permanent financing into a single transaction before the construction of the property improvements is completed, the property (and any partially completed improvements) must be covered by builder’s risk insurance. (This type of insurance was previously referred to as construction site insurance.)

Builder’s risk insurance covers any losses during the construction period that result from theft, vandalism, and acts of nature (including fire, flood, and wind damage).

The amount of the builder’s risk insurance coverage must be equal to the original mortgage loan amount.

The builder’s risk insurance may be canceled after the borrower obtains property (and, if applicable, flood) insurance that meets Fannie Mae’s standard requirements after the improvements are completed or the borrower occupies the property (whichever comes first).


Optional Coverage

Fannie Mae allows property insurance policies that include optional coverage such as those outlined below. However, Fannie Mae does not pay costs arising from disputes with insurance carriers in settling claims that relate only to this optional coverage.

Permissible coverage includes:

  • single-premium credit insurance policies and debt cancellation agreements that are free in all respects to the borrower,

  • single-premium mortgage insurance policies with a credit insurance feature where such credit insurance feature is free in all respects to the borrower, and

  • credit insurance policies that require borrowers to pay a separately identified premium on a monthly or annual basis or debt cancellation agreements that require borrowers to pay a separately identified fee on a monthly basis.

These credit insurance policies or debt cancellation agreements must be disclosed to the borrower in clear and simple terms in advance of purchase of the applicable policy or agreement.

Notwithstanding the lender’s compliance with the foregoing requirements, Fannie Mae purchases loans with debt cancellation agreements only upon Fannie Mae’s express written approval of the overall debt cancellation feature, including the debt cancellation agreement, and execution by the lender and Fannie Mae of a separately negotiated agreement.

The lender may act as a broker or agent in the sale of this type of credit insurance to the borrower.


Mortgage Defaults

The lender must reimburse Fannie Mae for attorney’s fees or any costs that it incurs if Fannie Mae brings an action on a defaulted mortgage and the borrower defends against Fannie Mae’s foreclosure or acts to enjoin Fannie Mae from liquidating the mortgage and one of the defenses or actions for injunction is based on:

  • an obligation of the lender (including as the broker or agent that obtained the credit insurance for the borrower and/or as a party that has agreed to collect premiums and remit them to the credit insurer on the borrower’s behalf),

  • an obligation of the credit insurance carrier, or

  • the obligation of the mortgage insurer to maintain credit insurance and apply benefits thereof to the borrower’s mortgage.

For example, acting as broker, a lender sells a borrower an insurance policy that makes mortgage payments if the borrower becomes disabled. Eventually, the borrower is disabled, but mortgage payments are not made because the lender allowed the insurance policy to lapse. When Fannie Mae attempts to foreclose on the mortgaged property, the borrower defends on the ground that the lender is responsible for the default. In these circumstances, Fannie Mae does not pay for any extra attorney’s fees or costs that result from the defense just described; these costs are the responsibility of the lender.


Unacceptable Types of Optional Coverage

Although certain property insurance policies that include optional coverage are allowed, Fannie Mae does not purchase or securitize mortgages in the following situations:

  • The premium/fee for single-premium credit insurance policies or debt cancellation agreements is paid directly by the borrower or paid indirectly by financing the premium/fee into the mortgage loan amount.

  • The premium/fee for single-premium mortgage insurance policies with a credit insurance feature is paid directly by the borrower or paid indirectly by rolling the credit insurance single premium into the cost of the mortgage insurance (whether or not it is identified as including a credit insurance premium).

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