Keeping What Works: How the GSEs are Protecting Homeowners, Taxpayers, and the Industry Blog FAQ?

An RCV policy provides borrowers with more financial protection. ACV policies provide substantially less coverage to homeowners at the time of a loss, usually resulting in much larger out of pocket expenses to repair their home. For homeowners who may not have financial means, this can lead to increased debt, incomplete repairs, and even dangerous living conditions. 

Allowing for properties secured by GSE mortgages to have less insurance coverage increases credit risk, particularly after disasters. Our long-established requirements not only help protect the safety and soundness of our companies, mortgage lenders and servicers, and U.S. taxpayers, but importantly, help protect homeowners themselves.

An RCV policy (also known as replacement cost coverage or replacement cost loss settlement), will settle claims without a deduction for depreciation, subject to the policy limit. RCV policies help ensure the borrower will be able to repair or replace the damaged portion of the insured property with materials of like kind and quality. In other words, it usually reduces the amount that the borrower will have to pay out of pocket after a loss. 

In contrast, an ACV policy will settle losses by calculating the cost to repair or replace the damaged property, with a deduction for depreciation. This means the borrower will nearly always receive a lower payout than if the policy settled losses on a replacement cost basis, thus reducing the amount of money available to repair or replace the damaged property. In most cases, an ACV policy will require a borrower to pay a greater portion of the loss amount out of pocket to repair the property. For example:

The Smiths have an RCV policy, meaning once the roof is replaced, they will be reimbursed the full cost of the roof repair, minus their deductible. The Johnsons have an ACV policy, meaning they will only be paid for the current value of the roof repairs, minus depreciation, and their deductible.

The breakdown of their payments is below.

Source: https://content.naic.org/article/rebuilding-after-storm-know-difference-between-replacement-cost-and-actual-cash-value-when-it-comes

The RCV is the estimated dollar amount necessary to rebuild the insured property with materials of like kind and quality after a total loss. Obtaining the RCV is a critical element in confirming a policy meets our minimum coverage amount requirements. Though it has a similar name, RCV is not the same as an RCV policy.

The GSEs’ requirements provide guidance on the minimum coverage limits required. On a typical single-family home, the minimum required coverage limit is calculated based on two important factors: the total RCV of the property and the unpaid principal balance (UPB) of the mortgage. Depending on these amounts, the requirement can be 1 of 3 values, which is determined by a simple formula. Without both values, it is impossible to determine whether the policy meets the GSEs’ requirements for the minimum coverage amount.

It is important to note that the market value of the property is not utilized in determining the minimum insurance requirements. Market values incorporate the value of the land, which is typically not covered in a homeowners insurance policy.

The February Guide clarifications reinforced lenders’ and servicers’ responsibilities to ensure that properties are covered by required insurance as part of our efforts to promote sustainable homeownership. This included clarifications to two key longstanding requirements in our Guides—first, that claims must be settled on a replacement cost basis, and second, that the estimated RCV is needed to determine whether the coverage amount meets the GSEs’ minimum coverage amount requirements.  

It is critical that homeowners have sufficient property insurance coverage so they can repair their homes and recover financially following a disaster or other insured loss. The need for sufficient property insurance coverage is a goal that is shared by investors, lenders, servicers and insurers alike. The GSEs’ long-standing property insurance requirements are critical in helping protect millions of homeowners, especially as natural disasters continue to increase in frequency and severity.

No, the GSEs did not make changes related to the unacceptability of ACV policies in the February communications. Neither GSE allowed ACV policies prior to the February communications. The GSEs continue to engage with industry partners to hear their concerns.

No, the GSEs’ insurance requirements do not address or impact insurers’ claim handling practices.

No, the GSEs did not change their long-established requirements for determining the required property insurance coverage amount.

The purpose of the GSEs’ joint communications on May 8 was to address subsequent industry feedback and concerns related to obtaining the RCV and to reinforce the importance of the GSEs’ property insurance requirements. We communicated that while we conduct industry outreach and engagement to further understand the concerns, we will not cite findings for certain noncompliance related to obtaining the RCV for the purposes of determining coverage amount sufficiency.

As outlined in our respective May 8 communications, the GSEs will refrain from citing applicable findings while we conduct industry outreach and explore solutions to ensure lenders and servicers can comply with our insurance requirements. Lenders’ and servicers’ responsibilities to ensure the property is adequately insured remain unchanged. We will communicate any applicable updates at a future date.

No, the May 8 communications did not impact the GSEs’ existing flood insurance requirements. Lenders and servicers are still required to comply with all applicable state and federal laws.

Yes, lenders’ and servicers’ obligations to ensure the property is adequately insured in accordance with the GSEs’ respective Guides remain unchanged. We expect lenders and servicers to continue with their processes to confirm the adequacy of property insurance coverage while we engage in industry outreach.

No, lenders’ and servicers’ obligation to indemnify the GSEs remain unchanged with respect to a loss resulting from insufficient property insurance coverage.