A Flood Insurance State of Mind
Servicers are obtaining a significant boost in efforts to
mandate flood insurance in high-risk zones.
...Continued from Previous Page
Up to speed
The office of North Carolina Insurance Commissioner Jim
Long has been conducting an outreach program, explaining the
federal flood insurance program and the need for flood insurance
to homeowners and businesses.
"We're also working with the [insurance] agent community,
telling them you need to be looking into this and making your
clients aware they need to look into buying flood insurance.
We've had agent seminars because many don't write a lot of
flood policies and are a little afraid of it. So we're trying to get the
agents, as well as the public, up to speed on it."
"Does the consumer need to be educated further?" asks
Mike Cox, product manager at Troy, Mich.-based Proctor
Financial Insurance Co. "That's a definite yes," replies the
chartered property and casualty underwriter to his own
question. "Few homeowners realize they're at greater risk of
flooding than they are of loss by fire.
"Some of the lack of knowledge is due to the fact it's not
explained to the homeowner by their insurance agent that flood
insurance is available as a separate policy. That's a key point.
Second, the homeowner needs to know that if their property is
not in a special flood hazard area, the NFIP has a special program
with rates discounted about 30% of what it would be in a special
flood hazard area. So education is a key."
That includes educating a wide spectrum of homeowners,
even those in areas that are not high risk but are still flood prone,
about the benefits of having flood insurance.
Of the 4.2 million homeowners with flood insurance, about 1
million are located in flood zones for which flood insurance is not
required, such as in the so-called 500-year flood zones, points out
GE Capital's Small.
"Since insurance [outside special flood hazard areas] is not
mandatory, lenders can't do anything about it," comments
Suzanne Gedney of Palma, Lazar & Ulsh LLC. "It's just a matter
of creating more awareness that flood insurance [in the non-
special flood hazard areas] is cheaper [than in special flood
hazard areas] and still protects you."
Close calls
"Lenders are starting to get a lot more serious about close
calls," says Marc A. Moore, a certified flood plain manager who is
vice president of compliance at Fidelity National Flood, Austin,
Texas. "There are lenders out there who require flood insurance
for homes in a 500-year flood plain. Some flood plains go up to
only the backyard, yet these properties will flood anyway Ð they'll
flood much worse than anyone expected."
"There are more losses outside than inside the special flood
hazard areas," notes Safeco's Yellin. "But as far as requiring
insurance in additional flood hazard areas, that would not be
acceptable to individual homeowners."
Freddie Mac, however, requires the imposition of flood
insurance on homes in any community in which flooding has
recently occurred, not just in the special flood hazard areas.
"A home may not be in a formally recognized flood zone, but
if the community has been flooded once, we look to the lender to
require flood insurance, even though it's not in a zone A," says Al
Lequang, mortgage policy manager and director of insurance at
Freddie Mac. "That's a requirement of ours. So while a home may
not be in a declared special flood zone, Freddie may require
flood insurance on a home in a 500-year flood plain."
This, he notes, has been done in some non-A zone areas of
Georgia and Texas that have suffered from flooding. More
recently such flooding requiring flood insurance for the first time
has occurred in some areas hit by Hurricane Floyd last summer.
Flooding outside the 100-year flood zones, Lequang
comments, "does appear to occur more frequently. We just hope
FEMA remaps these areas and upgrades the designation just as
they remapped LA to Zone A two years ago."
But while Freddie Mac does require flood insurance in
areas that recently flooded, the agency does not believe that
insurance should be required for all mortgaged homes in any of
the other flood-prone areas, including the 500-year flood zones.
"Who's to say which zone has higher risk?" Lequang asks.
"Who are we to say any of them should have flood insurance?"
The rescue
Meanwhile, to guarantee compliance with flood insurance
requirements, he points out, Freddie staff regularly go on site
and conduct audits of lenders and servicers for flood insurance
compliance.
"Our own experience," he notes, "shows that we don't have
flood losses."
Another factor is that even if a home has flood insurance,
that insurance may not be adequate because federal flood
insurance is limited to only $250,000. Gap or higher limits
coverage then comes to the rescue.
"If there's a need for $300,000," says Safeco's Yellin, "we
allow the lender to purchase the $50,000 excess over the $250,000
limit."
But a lot of nonconforming mortgages - the B, C, D and
jumbo mortgages, because they are not made by federally
regulated lenders and are not sold to the GSEs - do not fall
under the flood insurance requirement, notes Proctor
Insurance's Cox.
And those that do are more likely to have flood insurance
coverage that is allowed to lapse, Yellin points out.
"With the emergence of the B and C loan environment," he
says, "we have a substantially larger percentage that allow their
insurance, from homeowners insurance to flood insurance, to
lapse. But despite the improved economy, lender-placed
insurance for A borrowers has remained the same as it was in the
late '80s," he says.
Most of these lapsed borrowers simply do not take care of
their own personal business, says Yellin. Smaller numbers either
reject the idea of being told they must do or have something or
they simply say, 'Let the lender do it and charge me.'"
Still, Yellin is upbeat. "We've seen increased compliance
since the act was amended. And compliance will just continue
to get better."
This article was previously published in the May 2000 Issue of Servicing Management.
