Industry Letter

SUBJECT: Toxic Mold in Texas
TO: All Freddie Mac Sellers and Servicers

Due to recent actions taken by the insurance industry in Texas, toxic mold has become a major focus of the mortgage industry. These actions do not affect Freddie Mac’s requirements for property insurance coverage on 1- to 4-unit properties, found in Section 58.2 of the Freddie Mac Single-Family Seller/Servicer Guide (Guide) and in Freddie Mac/Fannie Mae’s Uniform Instruments.

The information reviewed here applies only to 1- to 4-unit properties.

Effects of Mold Claims on Texas Insurers

A standard homeowner insurance policy typically does not cover losses caused by mold. Mold coverage under Texas insurance policies is unique to that State.

In general, insurers will pay on a policy claim only if the mold is the result of a sudden and accidental discharge of water or steam. In fact, the National Flood Insurance Program’s Dwelling Policy excludes coverage for “water, moisture, mildew or mold damage caused by the policyholder’s failure to inspect and maintain the insured property after the flood waters recede.”

Texas has seen more claims than other jurisdictions mainly because, unlike the rest of the nation, the Texas homeowner policy also includes coverage requiring insurers to pay for water damage caused by maintenance problems.

Freddie Mac Insurance Coverage Requirements for 1- to 4-Unit Properties

In light of recent developments, we are reminding Sellers and Servicers that Freddie Mac does not require mold coverage in Texas or any other jurisdiction.

The terms of coverage under any homeowner insurance policy and accompanying endorsements covering any 1- to 4-unit property securing a Mortgage owned by or offered for sale to Freddie Mac must meet the following conditions:

1. At a minimum, the insurance must cover losses caused by fire and lightning or any one of the perils included in the insurance industry’s standard extended coverage as that term is used in Section 58.2 (Minimum Property Insurance Types and Amounts) of the Guide and, in the case of Texas Mortgages, Uniform Covenant 5 of the Texas Deed of Trust (Texas-Single Family-Fannie Mae/Freddie Mac Uniform Instrument, Form 3044). The insurance industry defines extended coverage as coverage of windstorm, hail, explosion, riot, civil commotion, damage by aircraft, damage by vehicle and damage by smoke.
2. The insurance must compensate for losses from any of the above perils on a replacement cost basis.

Freddie Mac does not dictate which of the new Texas homeowner insurance products a loan originator or loan Servicer may accept. The Seller or Servicer of a Mortgage originated for sale to us or serviced for us must exercise due diligence to ensure that it can warrant that the coverage terms, at a minimum, meet both of the above conditions (a) and (b).

Section 58.2 of the Guide governs the obligations of the Seller/Servicer concerning property insurance requirements for 1- to 4-unit properties.

Freddie Mac Servicing Requirements for 1- to 4-Unit Mortgages

We have not changed our insurance claim processing requirements; a Servicer’s release of insurance proceeds to a Borrower continues to be governed by the provisions of Section 58.10 (Insurance Loss Settlements) of the Guide.

A Servicer should contact our Special Asset Unit as soon as possible when they become aware of a mold-infested property for guidance and direction. Our Special Asset Unit staff must approve an exception to any of our provisions for mold-related concerns, in consideration of facts reported by the Servicer.

Servicers must be diligent in applying to the particular situation all applicable provisions of the Guide, including but not limited to Sections 64.7, 65.25, 65.33, 66.12, 66.13, 66.35 and 67.27.

Freddie Mac Servicing Requirements for 1- to 4-Unit REO

Servicers must be diligent in applying to the situation at hand all applicable provisions of the Guide, including but not limited to Sections 70.4 (General Requirements) and 70.16 (Property Insurance).

Our REO staff will determine, on a case-by-case basis, how to handle mold infestations depending on their assessment of the severity of each infestation and our liability exposure.

Author: Contributor