On the heels of a year marked by extreme weather and natural disasters, a global pandemic, and record-breaking origination and refinance volumes, those who work in the mortgage industry have certainly felt the impact of these events on their lives and livelihoods. Operating in a business-as-usual manner was not possible in 2020, and likely won’t be for quite some time as volumes—though tapering off a bit—continue to remain steady. With experts predicting another tumultuous hurricane season ahead, servicers should work to identify issues that may leave their portfolios open to risks as early as possible, to prepare for the road that lies ahead.
I’ve been in the flood business for 30 years, and I have seen servicers face many challenges throughout that time. While much has changed in that time span, servicers must continually consider the following factors when it comes to managing their portfolios: risk mitigation, streamlining operations, minimizing losses, reducing costs, and elevating the borrower experience. Tools and technology, coupled with a strong flood determination and tracking partner who can help inform decision-making, can help servicers better manage their flood portfolios and make the process more efficient in the end.
Here are the top five most common challenges servicers face when managing properties in their flood portfolios, after the initial flood zone determination has been completed and the loan is closed.
1. Large Revisions That Affect the Portfolio
Over the years, the Federal Emergency Management Agency (FEMA) has undergone a map modernization process, improving the products used for making determinations and updating paper maps to digital images. Through the FEMA Map Service Center process, new maps are typically issued on a twice-monthly cadence, with anywhere from five to 10 counties receiving mapping revisions. Of the determinations revised, around 2% to 3% are impacted by an insurance change according to the National Flood Association’s annual member survey results (2009-2020). To cite a recent example: Charleston County, South Carolina’s maps were revised in January 2021, and roughly 10% of the determinations tracked by ServiceLink were impacted by an insurance change, mapping these properties outside of the required flood zone. That’s great news for the borrower in this instance, but that is not always the case. These revisions sometimes mean mapping into a flood zone, which necessitates the addition of flood insurance. One way servicers can ensure they are creating efficiencies for themselves is to keep their portfolios up to date by getting inactive loans cleaned up.
2. Letter of Map Changes for Individual Properties
A Letter of Map Change (LOMC), defined by FEMA as a letter which reflects an official change to an effective Flood Insurance Rate Map (FIRM), can impact a servicer’s properties at the address (LOMA) or panel (LOMR) level. Keeping up with these changes can be a challenge, and if multiple properties are impacted in a servicer’s portfolio at once, that can increase workload and have a domino effect with multiple borrowers (from a small handful to many more … ) disputing the change within the same timeframe. By leveraging flood tracking tools and technology, a servicer can stay apprised of these changes in real time and work swiftly to remediate any issues and help borrowers at the same time.
3. Flood Zone Discrepancies Between the Lender and the Insurance Provider
During the servicing of a loan, discrepancies between lenders and insurance providers can occur which can cause confusion and frustration for the borrower (or other parties involved in the Life of Loan process). Some of the most common reasons for these discrepancies include flood map limitations, differences between available map resources, close calls, and Letter of Map Changes (LOMC). Diving a bit deeper: during the flood map revision process, entire watersheds encompassing potentially thousands of acres can be included in a singular map revision. For the engineers completing a study, “connecting the dots” between cross sections can inadvertently neglect to capture natural areas of high or low elevations between benchmarks. These structures that lie on the fringe of the Special Flood Hazard Area account for a great deal of the Letter of Map Amendment applications. In addition, discrepancies between paper and digital map types could result in zoning variations as both types hold the same weight in FEMA’s eyes, yet may vary slightly. Lastly, close calls—due to researchers using different mediums to determine a flood zone—and lack of a comprehensive library of historical LOMC data, can also cause a difference in determinations. While these discrepancies are bound to happen from time to time, working with a trusted partner can help servicers determine the best portfolio strategy.
4. Evolving Regulatory Requirements
Changes to regulatory requirements and guidelines to flood tracking—such as flood insurance requirements for a secondary structure or the expiration of the flood form and reauthorization of the National Flood Insurance Program (NFIP)—keep many servicers up at night. With multiple channels and sources to stay informed, it can be easy to miss issues that may impact servicers and their portfolios; that’s why staying vigilant is key. Signing up for relevant industry newsletters and visiting the NFIP and FEMA sites often for updates can be one small tactic servicers can leverage to stay informed.
5. Notification of Cancellations and Payoffs
Life of Loan is often an afterthought in flood tracking, unfortunately, because as long as a flood determination provider is tracking the loan for future map revisions, the lender is in compliance. However, when there is a large map revision that affects the portfolio, tracking additional loans becomes confusing and cumbersome if the lender is being notified of map revisions that are no longer in their portfolio. Maintaining an efficient portfolio tracking process and sending paid off loan and service release notifications to flood determination and tracking partners in a timely manner can help alleviate stress and reduce workloads.
While we can’t control natural disasters and flooding from occurring, we can control our preparedness and response to them. Understanding and keeping up with evolving regulatory changes, addressing today’s challenges with tools and technology while keeping long-term implications in-mind and leaning on a trusted partner are all tactics a servicer should consider leveraging on a go-forward basis.