The results of a new audit conducted by the Department of Housing and Urban Development (HUD) indicate more than 30,000 properties nationwide are underinsured for flood disasters. Cumulatively, this means that about $4.5 billion in loans (and quite possibly that number is higher) do not have what HUD deems “adequate coverage from the National Flood Insurance Program” (NFIP). The main culprit, the audit found, was homeowners or lenders accepting private flood insurance instead of requiring NFIP coverage on the properties, but many homeowners simply elected not to purchase coverage in 2020, the most recent year reviewed.
“The FHA insurance fund was potentially exposed to greater risk from [these loans],” wrote Kilah White, assistant inspector general for audit in Georgia in a public memo. The audit included recommendations for improving the situation, mainly involving lenders verifying ongoing flood coverage that meets the requirements set forth by HUD in the terms of the loan.
Flood insurance is mandatory for federally insured loans in areas of the country considered to be in a floodplain that has “a 1 percent or greater chance of flood occurrence in any given year.” Lenders are not supposed to “make, increase, extend, or renew” loans in these areas without meeting conditions that require the property to have not just flood insurance, but the right flood insurance. At present, the FHA does not permit non-NFIP insurance as an option to satisfy purchase requirements, but the audit found that homeowners were changing coverage after the purchase of the property.
“There is widespread confusion about what policies will cover damages caused by a flood. Nearly 65 percent of homeowners would turn to their home insurance carrier in the case of a flood,” wrote CommonWealth contributor Bill Martin in a March 2022 op-ed. “They would be out of luck,” he warned, because most home insurance policies exclude flood damage even if they cover other types of water damage like leaking pipes or rainwater coming in through the roof. “It is this separation of flood from other perils that has created confusion amongst homeowners,” he concluded.
Although HUD is primarily concerned with the loans it has insured that are not appropriately covered in the event of a flood, all real estate investors should make sure that they review their property insurance coverage and that they are covered in the event of all types of catastrophic damage. Not all properties need flood insurance, but it is not safe to assume that your lender or HUD knows exactly what you will need in terms of coverage. Even if you are not required to have flood insurance, review the history of your area and make an educated decision about obtaining and maintaining this type of coverage.