Servicing Management

FLOOD/HAZARD INSURANCE

Risky Business

It's a balancing act as servicers struggle to reduce costs and protect assets.

Insurance Pressures On The Rise

Many maps outdated

More flood-prone homeowners would be required to have flood insurance not only if maps were updated, but also if more communities participated in the federal flood program, notes Cheryl Small, president of the National Flood Determination Association and director of industry and agency relations at GE Capital Flood Services, Lakewood, Colo.

"There are 25,000 outdated maps that have inadequate flood hazard data and over 2,700 flood-prone communities have never been mapped by Federal Emergency Management Agency," she points out.

"We at GE Capital use the latest technology to keep on top of the maps but if flood-prone areas are not identified on the flood maps, then folks who are in 100-year flood plains are not going to be insured. That is the really important issue."

FEMA is currently doing little remapping and last summer's hurricane-related flooding will have little influence on what remapping does occur.

"It would not prompt remapping," explains FEMA spokesperson Mark Stevens. "And claims from a particular flood disaster would not result in a map revision. It would take more than that. Remapping is now done on an ad hoc basis. It depends on whether or not there are some particular changing circumstances in a community that will affect the flood hazard. Often a community will contact FEMA and request a remapping."

That could occur, he points out, when changes in run-off patterns due to new development could increase flood hazards or when a development, such as a new levee, could decrease flood hazards.

When to remap

Generally remapping is done for a community every five years, although it could be done more frequently or less frequently, depending on the circumstances, Stevens says.

"A map modernization effort is being developed," he says. "But the agency is still trying to figure out how that will be funded because it's a very expensive proposition."

Meanwhile, of FEMA's 4.1 million flood insurance policies, 1.2 million, or 29.3%, are on properties outside the special flood hazard areas, and more than one-fourth of all claims are on those properties, according to Stevens.

FEMA and many flood service providers, originators and servicers encourage homeowners in these areas Ð the B, C and X zones Ð to carry flood insurance. Although lenders cannot impose flood insurance on them under the 1994 act, many point out, they can require flood insurance under terms of a mortgage.

But currently not even a majority of homeowners in the special flood hazard areas have flood insurance, according to FEMA.

FEMA estimates that there are 11 million households in the special flood hazard areas - households that should have flood insurance - and yet only 2.9 million of them, or 26.4% are covered by flood insurance, says Stevens.

"Those are the folks exposed to the highest risk and when only one-fourth of them are covered, it's unsettling," he comments.

What technology does

Technology is used by service providers to quickly determine whether a property is in an A or V flood hazard zone and thus must have flood insurance. It also is used to not only make sure flood and/or hazard, fire or homeowners insurance is obtained, but to make sure those policies do not lapse by keeping in contact with borrowers and insurance agents and carriers.

And technology is used to identify for servicers any homes that are placed in A and V zones as a result of remapping, and thus must now have flood insurance. This is especially important because of requirements imposed by Fannie Mae and Freddie Mac.

Those government-sponsored enterprises require lenders and servicers to monitor map changes and any other changes in the status of community participation in the FEMA mapping program and then make any necessary alterations in flood insurance requirements for the properties in their portfolios.

"That goes a bit beyond what the law requires a lender to do - that they have the insurance in place and keep it in place," Geotrac's White notes.

"But many lenders had been doing that monitoring already when it was imposed by Freddie and Fannie. Requiring insurance after a map change is one technique to mitigate the risk in a portfolio.

"The firm that does the original flood zone determination," White explains, "also tracks the mapping for life-of-loan to see if there have been any changes."Such technology driven tracking makes life easier for originators and servicers who, along with their outsource insurance service providers, utilize this and other technology.

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