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FHA Loan Rules For Flood and Hazard Insurance

In the wake of Hurricane Sandy, it seems like a good time to review a recent FHA Mortgagee Letter which addresses issues regarding hazard and flood insurance payments. While not all FHA borrowers may be affected by either storm damage or the rules in this FHA mortgagee letter, those that are affected should know the latest FHA guidance.

FHA mortgagee letter 2012-19, titled “Hazard and Flood Insurance Requirement Reminder”  reminds lenders about the Department of Housing and Urban Development’s “existing servicing procedures as they pertain to releasing hazard insurance proceeds for damaged properties securing Federal Housing Administration (FHA) insured mortgage loans.”

According to the letter, the FHA “standard mortgage document” requires that the mortgagee–the lender–is named as a “Loss Payee” on the hazard insurance policy issued in connection with an FHA mortgage. According to the FHA, “This requirement helps ensure that hazard insurance proceeds are available to rebuild damaged property.  It also protects mortgagees in the event properties cannot be rebuilt and some or all of the insurance proceeds are required to pay off the outstanding loan indebtedness.”

The FHA adds, “Timely receipt of flood and hazard insurance proceeds allows mortgagors to rebuild their homes and provide some stability for their families.” The mortgagor is the home owner.

FHA continues, stating, “Therefore, mortgagees are strongly encouraged to assist mortgagors by: (1) providing copies of hazard insurance policies and information when requested; (2) promptly releasing hazard insurance claim proceeds when a viable repair plan has been approved; and (3) following standard procedures to ensure that hazard insurance claims are filed and settled in an expeditious manner.”

In other words, the FHA is advising lenders to promptly release insurance funds when they become available rather than delaying those funds once paid. Consider the next paragraph in FHA mortgagee letter 2012-19, which states:

“In addition to repair coverage for damaged properties, some hazard insurance policies include coverage for replacement of personal property, temporary housing, and other transition expenses.  If a mortgagee receives funds from a hazard insurance company for coverage of a mortgagor’s personal property, temporary housing, and other transition expenses, then the mortgagee must promptly release such proceeds to the mortgagor. The mortgagee may not withhold disbursement of such proceeds to cover an existing arrearage without the written consent of the mortgagor.”  (Emphasis ours.)

If you have questions or concerns about this policy or feel the policy has not been followed in a particular instance, call the FHA directly at 1-800 CALL FHA.

Joe Wallace - Staff Writer

By Joe Wallace

November 7, 2012

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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