What Happened?
Mortgage servicers should take note that on June 30, 2025, Louisiana Governor Jeff Landry signed into law HB 356 (2025 La. Acts 480) creating the Stated Value Policy Act (the “Act”) which allows insurers to offer residential property owners an insurance policy based on the total debt of a mortgage loan. While the Act is not directly applicable to residential mortgage servicers, its implications will impact residential mortgage servicers. This law is effective as of June 30th.
Why is it Important?
Under the Act, a “stated value policy” is a “residential insurance policy under which the insured has the option to declare a stated value for the insured residential property, which is agreed upon by the insurer as the amount of insurance coverage, irrespective of the current market value of the property.”
Insurers are required to provide a coverage limit for residential property in an amount not less than the total assessed fair market value of the property, based on the most recent assessment of the parish in which the property is located. However, if the property doesn’t have any mortgage, then the homeowner can insure the property for any stated amount of insurance. If there is a mortgage on the property, an insurer can also provide a stated value policy for a sum not less than the “verified outstanding balance of any mortgage on the homeowner’s property, ensuring that the insurance coverage adequately reflects the financial obligations associated with the property.” To satisfy the verification requirements, the homeowner electing a stated value policy must submit to his insurer a written accurate payoff statement from the entity holding the mortgage along with a mortgage certificate from the clerk of court indicating the presence or absence of a mortgage on the property.
It is also worth noting that before issuing any policy that limits coverage on the residential property equal to the unpaid principal balance of all mortgage loans on the policy, the insurer must obtain a signed statement from all insureds which contains a notice in boldfaced 18 point font that provides “YOU ARE ELECTING TO PURCHASE COVERAGE AT A LIMIT THAT IS EQUAL TO ONLY THE UNPAID PRINCIPAL BALANCE OF THE MORTGAGE LOAN ON YOUR HOME. ACCORDINGLY, IN THE EVENT OF TOTAL LOSS OF YOUR HOME OR A LOSS FOR WHCH THE COST TO REPAIR YOUR HOME EXCEEDS THE UNPAID BALANCE ON YOUR MORTGAGE LOAN, YOU WILL INCUR SIGNIFICANT FINANCIAL LOSSES INCLUDING THE POTENTIAL LOSS OF SOME OF YOUR HOME EQUITY.”
Depending on the investor of the borrower’s loans, a borrower’s election to obtain a stated value policy could conflict with investor requirements. For example, Freddie Mac imposes insurance limits that must at least equal the higher of: (i) The unpaid principal balance (UPB) of the mortgage, or (ii) 80% of the full replacement cost value (RCV) of the insurable improvements as of the current insurance policy effective date. Moreover, insurance policies must provide for claims to be settled on a replacement cost basis. As Freddie Mac states, if during the term of the mortgage, the mortgaged property is not covered by the minimum property insurance requirements, the servicer must comply with Freddie Mac’s lender placed insurance requirements. On the other hand, Fannie Mae requires that lender or servicer verify that the property insurance coverage amount for a first mortgage secured by one- to four-unit property is at least equal to the lesser of: (i) 100% of the RCV of the improvements as of the current property insurance policy effective date, or (ii) the UPB of the loan, provided it equals no less than 80% of the RCV of the improvements as of the current property insurance policy effective date.
What to Do Now?
Now may be a good time to educate Louisiana borrowers of the applicable insurance requirements applicable to their loans so that borrowers don’t obtain a policy inconsistent with investor requirements.
