Government-sponsored enterprise (GSE) Fannie Mae (FNM) will continue to purchase mortgage loans secured by properties in flood-prone areas, despite a lapse in national flood insurance. The Federal Emergency Management Agency‘s (FEMA) authority to issue policies under the National Flood Insurance Program (NFIP) ended on March 28th. Although Congress is expected to reauthorize the NFIP in the near future, FEMA cannot issue new policies or increase or renew coverage on existing policies in the interim. Fannie said in a letter to lenders this week it will continue to purchase loans secured by properties in special flood-hazard areas without active insurance policies, “to help ensure the continued availability of mortgage financing” in the affected areas. As long as the NFIP is reauthorized by April 30, 2010 and applied retroactively to March 29th, Fannie will purchase loans closed during the program’s lapse and delivered to the GSE before NFIP’s re-authorization. Borrowers must provide evidence of a completed application for flood insurance and a copy of a check or the final HUD-1 Settlement Statement showing payment of the initial premium. Borrowers must also be able to provide evidence of the assignment of an existing flood insurance policy from the property seller. In order to deliver mortgage loans to Fannie, lenders must have a process in place to identify mortgaged properties without proper evidence of active flood insurance. Lenders must also take steps to obtain coverage once the NFIP authority is renewed, and retain documentation of acceptable flood insurance. Fannie noted refinance mortgage loans secured by properties in flood hazard areas typically have acceptable flood insurance coverage already in place at the time of closing. But Fannie will apply these purchase conditions to refinance mortgage loans where the renewal date of the borrower’s existing coverage occurs during the lapse period and before delivery to Fannie Mae. Write to Diana Golobay. Disclosure: The author holds no relevant investment positions.