Flood Risk in the Mortgage Market

On January 13, 2025, the CFPB put out a report entitled, Flood Risk and the U.S. Mortgage Market (Report), that looked at flood insurance coverage and the fact that “adequate coverage” is often tied to a borrower’s location and/or their financial standing. For example, the Report looked at the southeastern and central southwest regions of the U.S. and found that homeowners located near the coast often had adequate flood insurance coverage and the means to recover more than those located inland near rivers and streams. The analysis shows that the flood risk exposure of the mortgage market is more extensive and more geographically dispersed than previously understood...key findings include:

• Current flood insurance maps may not capture accurate flood risk exposure.
• Over 400,000 homes may be underinsured for flooding events in the southeast and central southwestern parts of the country alone.
• Homeowners who may be underinsured for flood risk also are least likely to be able to self-insure and recover from flooding.

Financial institutions are tasked with ensuring that properties located in a Special Flood Hazard Area that secure a loan are covered with adequate flood insurance. And you are probably aware of the “lesser of three” calculation that must be met. Specifically, flood insurance coverage must be obtained in an amount equal to the lesser of the following:

1. The outstanding principal balance of all loans secured by the property.
2. The overall or “insurable” value of the property minus the land value.
3. The maximum amount of insurance available under the principal flood insurance program/NFIP.

Determining the “insurable value” is the one that we see financial institutions struggle with the most. David discussed it in more detail during our January 2025 Monthly Connection.

Published
2025/02/05