Loan in question is secured by two properties, a house in a SFHA and farm land that is not in a flood zone and does not have any structures on it at all. The total principal balance on the loan is approximately $130,000. The PVA assessed value of the house is $72,000 and the value of the land is $100,000. The Borrower’s current hazard insurance policy lists the replacement value of the house as $91,000. Currently we have a force-placed policy on the property in the flood zone for the full principal balance of the loan.

Can we lower the coverage amount on our force placed policy to cover only the replacement value on the house instead of the entire principal balance?

I recommend lowering the coverage (back to the effective date of the policy) to the insurable value of the structure and give the borrower a refund of the extra premium paid. You are basically over-insuring the structure, the borrower is paying for coverage that they would not be able to benefit from in the event of a claim.