A Flood Insurance State of Mind
Servicers are obtaining a significant boost in efforts to
mandate flood insurance in high-risk zones.
BY JERRY DEMUTH
Flooding caused by Hurricane Floyd in Summer 1999
substantially damaged thousands of houses and properties in
several states, but only a small percentage of them had flood
insurance.
A powerful movement of government officials from the state
on up to the federal level - lenders, servicers, the government-
sponsored enterprises (GSEs) and insurance firms - are working to
ensure that this situation changes.
They are sponsoring and encouraging educational efforts to
convince borrowers to obtain and maintain flood insurance if they
are located in special flood hazard areas or in communities that
have experienced flooding.
There appears to be a consensus among these groups that
while the campaign to get the message out is expanding, much
still needs to be done.
The GSEs, HUD, the Veterans Administrations (VA) and
federally regulated lenders are all mandated to have borrowers
in special flood hazard areas - the 100-year flood zones - obtain
flood insurance. And, if that insurance lapses, lenders and
servicers, under the terms of the Flood Reform Act of 1994, must
obtain a flood insurance policy for the borrower and impose it on
the borrower.
But, despite those requirements, many borrowers in special
flood hazard areas still do not readily accept having, and
continuing, flood insurance coverage.
Floyd's floods
Despite the risk of flooding, there are many who do not
obtain or fail to maintain flood insurance, a source of frustration
for government officials, mortgage servicers and insurance
companies.
In fact, only an estimated 25% of the homes nationally that
are located in high-risk flood hazard zones maintain a flood
insurance policy, according to Mark Stevens, a spokesman for
the National Flood Insurance Program (NFIP), part of the
Federal Emergency Management Agency (FEMA).
"We can only assume that the number is much smaller in the
other areas," that are not in flood-prone localities, he adds.
In Pitt County, N.C., one of the areas severely hit by Hurricane
Floyd, county records indicate there are a total of 55,700 housing
units described as being in "livable" conditions. According to
FEMA, there are 1,117 flood insurance polices in force for the 10
cities and towns that comprise Pitt County, 638 of which are for
structures in high-risk flood zones.
As an example of the severity of the flooding caused by
Hurricane Floyd in Pitt County, 554 houses and other buildings in
the city of Greenville suffered substantial flood damage, described
as 50% or more of the property being damaged, according to the
county's planning department. Neither FEMA or the county were
able to indicate how many of the damaged structures had flood
insurance.
An education
Lenders, servicers, insurance agencies, FEMA and state
officials are hoping that educational efforts, combined with the
heavy publicity given recent flood disasters, will lead to more
homeowners located in flood-prone areas to obtain and maintain
flood insurance.
However, for those that do not, force-placement of flood
insurance policies becomes necessary. This creates additional
work for lenders and servicers but their loan collateral is
otherwise at risk, making that hassle acceptable.
Thus there is little or no interest in expanding the flood
insurance requirements to such other flood-prone areas as the
so-called 500-year flood zones where flooding may occur, but
where the risk is lower. Nor is there much interest in or support
for making flood insurance a part of homeowners insurance
policies.
"Since most everybody has a mortgage, tying the [flood
insurance] requirement to a mortgage is a good idea," says the
Consumer Federation of America's Insurance Director Robert
Hunter, who headed FEMA in the 1970s during the Ford
Administration. "But the requirement ought to be in just the high
risk areas. In those communities where there's still risk outside
the high-risk zones, that's where education would be very helpful.
"Having these [flood] maps is a very educational tool if
people will go look at them. The problem is people aren't
educated to go look at these maps before they buy a house. Most
people don't even know there's a [flood] map of their community
where they can see how their house would fare if a flood occurred.
"People need to look at a map and see what would happen
to them. They might be right across the street from where it's
required. They ought to know that. In a high-risk area, it might
mean getting five feet of water, while in a borderline area they
get three feet. That's still a lot of damage and you'd be much
better off having flood insurance. So the education ought to be
aimed at people who are still at risk but are not required to buy
[flood insurance]."
But about 2,700 flood prone communities have not been
mapped for flood risks, points out Cheryl Small, director of
industry and agency relations at Lakewood, Colo.-based GE
Capital Flood Services, and many existing maps date back to the
1970s and 1980s and have yet to be updated.
"It's important," she stresses, "that FEMA find a way to
fund their map modernization program."
"Insurance agencies need to be more proactive, letting folks
know flooding is not covered by homeowners insurance," says
Small, who also is president of the National Flood Determination
Association. "Unfortunately people are a little naive. Folks
always feel they will be bailed out by the federal government
through some type of disaster assistance or grants."
In certain cases, FEMA has set strict rules for obtaining
federal disaster assistance. For instance, FEMA's Stevens says
that a homeowner who previously received such assistance is
required to obtain and maintain a flood insurance policy to be
eligible for future assistance if flood damage is incurred once
again.
Lenders also often need educating about flood insurance,
Small explains. "We spend a lot of time educating the lender and
talking with homeowners on behalf of the lender. We spend quite
a bit of time on the education side to homeowners and our
clients."
"Education is one way to get more people to participate,"
says Dale Yellin, president of Santa Ana, Calif.-based Safeco
Select Insurance Services, who still wonders whether even with
education people will willingly accept flood insurance. "I don't
know if there's more acceptance of flood insurance or if it's just
seen as a necessary evil. Borrower acceptance of the flood
requirement doesn't necessarily make them any more or less
prone to keep the policy in force.
"But flood insurance also has to be easier to obtain," he
insists. "From an insurance industry standpoint, the thing that's
going to help most would be to make it easier for the agent to sell
and process flood insurance. It has to become easier for agents to
determine which rate table they are going to use. One of the
biggest difficulties in the process is the requirement for an
elevation certificate that requires a survey that enters into the
rating process, that determines which rate table the agent is
going to use."
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