The recent letter from a group of congressional leaders to the Federal Housing Finance Agency is a clear signal that homeownership in America is reaching a breaking point. Their concern centers on the FHFA’s prohibition against Actual Cash Value (ACV) homeowners insurance policies for federally backed mortgages. They are asking for it to be removed so that more people can purchase a home, which may seem like sound financial policy on paper but ignores the reality that many Americans can no longer afford the cost of full replacement cost insurance.
I’ve written about this issue before, in articles such as Fannie Mae and Freddie Mac Guidelines to Insure at Full Replacement Cost Finally Hit the Insurance Media, The Looming Homeownership Crisis: A Ticking Time Bomb of Underinsurance, Florida’s Proposed Mortgage-Only Insurance Law Is Illegal, and After a Loss, Don’t Forget About Your Mortgage Company. Each explored a different piece of the same puzzle, analyzing the widening gap between what it costs to repair a home and what average Americans can afford to insure.
The congressional letter argues that requiring nationwide replacement cost coverage imposes a one-size-fits-all approach that doesn’t reflect the economic realities of rural and lower-value markets. In places where home values are modest and incomes limited, forcing homeowners to buy replacement cost coverage, often doubling premiums, makes the difference between being able to own a home and being priced out entirely. The lawmakers frame this as a question of “consumer choice,” but what they’re really pointing to is a larger economic truth: many Americans, especially retirees and rural families, can no longer afford the cost of owning the homes they already have. The letter appears to address the problem that people cannot qualify to purchase homes due to these requirements.
That should trouble all of us.
Insurance isn’t just a bureaucratic requirement. Instead, it’s the financial mechanism that allows homes to be repaired after a catastrophe. If we start allowing borrowers to go without full coverage—or, worse, to carry no meaningful coverage at all—we’re not promoting freedom of choice. We’re setting up millions of families, and the financial system itself, for a future wave of defaults and unrepairable homes. We’ve seen what happens when lending standards are relaxed for the sake of “affordability.” The 2008 financial crisis started with the same rationale. We expanded homeownership by lowering the bar, not auditing whether purchasers could really afford to own the home, and it ended with millions losing both their homes and their savings. It nearly destroyed the country’s financial backbone.
Still, there’s no denying the tension. The cost of property insurance, particularly in disaster-prone states like Florida, Texas, California, and Louisiana, has exploded. For retirees on fixed incomes, the inflation in construction and insurance costs can turn a paid-off home into an unaffordable liability. For first-time buyers, the math simply no longer works. And yet, pretending that insurance isn’t part of the true cost of homeownership is financial denialism.
If a person cannot afford insurance, how can they afford to rebuild after a loss? The simple answer is “they can’t.” And when they can’t, the loss doesn’t just belong to them. It ripples outward to lenders, local economies, and the broader housing market.
Lenders hold onto insurance payments and require the collateral to be repaired. If the insurance purchased is not enough to repair the structure and the policyholder cannot afford to pay the difference, what happens? That situation was not addressed in the Congressional letter. But that is the elephant in the room question when we allow people who cannot afford to purchase full coverage insurance to qualify for mortgages.
Perhaps there is room for compromise in limited situations. For example, when the land value equals or exceeds the loan balance, it may make sense to adjust insurance requirements. Maybe the borrower has other assets that show the ability to afford the repair and chooses to purchase the lower-priced insurance. But eliminating or diluting coverage requirements wholesale would be a dangerous gamble. The promise of homeownership was never meant to be a house of cards built on wishful thinking and underinsurance.
The real challenge isn’t to make insurance optional. The challenge is to make it affordable again. That means confronting the systemic issues driving costs. The most important issue is to acknowledge risk and building to mitigate against its severity and frequency. We need to build smarter and plan more for the risks we face.
Until policymakers address the root causes of why insurance costs so much, any attempt to temporarily “fix” affordability by stripping away needed insurance protection in case of calamity will be nothing more than rearranging deck chairs on the Titanic.
Thought for the Day
“An investment in knowledge pays the best interest.”
— Benjamin Franklin