Lenders Could Be At Financial Risk Despite Protection With Home Flood Insurance

As flooding across the U.S. continues to be a serious issue, the effect of loss or damage to homes has dramatically increased. And because most properties are financed, that home serves as collateral to lenders. This in turn means that lenders have a greater financial stake when properties are damaged by flood waters. What makes this situation worse is when the homeowner abandons the home and/or stops making mortgage payments.

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Homes and businesses in high-risk floodareas with mortgages from federallyregulated or insuredlenders are required to have flood insurance. While flood insuranceis not federally requiredfor homes in a moderate- to low-risk floodarea, lenders may still requireflood insurance. Flood insurance is the only way lenders can protect an investment in case of a loss. Lenders need to be aware that properties in their portfolios can move into a covered flood area, which means it would need flood insurance to cover potential loss.  

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Federal Emergency Management Agency (FEMA) applies precise standards and the most accurate hazard information to develop Flood Insurance Rate Maps (FIRM) that show flood zones. However, limitations in the scale or topographic details of the source maps used to prepare a FIRM may result in small elevated areas to be included in a SFHA. Because of this, lenders could face a significant loss if the property is flooded and does not have flood insurance due to Letter of Map Conversion. 

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In order to change the flood hazard designation for properties in these areas, FEMA has set up a process called the Letter of Map Amendment (LOMA) for properties on naturally high ground, Letter of Map Revision (LOMR), a modification to FIRM or flood boundary and floodway map (FBFM) and the Letter of Map Revision Based on Fill (LOMR-F) for properties elevated by placement of fill. These determinations officially amend an effective FIRM. Lenders need to be aware of a property that no longer requires flood insurance as they need to provide a refund to owners if they continue to pay it. 

If LOMA, LOMR, or LOMR-F prove the property is correctly shown outside the SFHA, the mandatory federal flood insurance requirement is no longer applied. Again, lenders can require flood insurance as a condition of the loan, but premiums are lowered for structures outside the SFHA. And if lenders remove the flood insurance requirement altogether, a refund of the premium paid could be issued or the policy canceled.

FEMA does not charge a fee to review a LOMA request, but requesters are responsible for providing the required mapping and survey information specific to their property. For FEMA to remove a structure from the SFHA through the LOMA process, federal regulations require the lowest ground touching the structure, or Lowest Adjacent Grade (LAG) elevation, to be at or above the Base Flood Elevation (BFE).  Lenders can send homeowners who want to file a request for conditional and final map revisions to the FEMA LOMC Clearinghouse.FEMA does recommend flood insurance coverage even if it’s not required by law or a lender. Mortgaged homeowners are eligible to pay much less for the flood insurance if their property is removed from the SFHA through this LOMA, LOMR or LOMR-F. Lenders need to be aware of the flood zone status of the properties in their portfolios and know where to send borrowers who want to challenge those designations. 

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