According to a new intelligence report published written by Scott Giberson, Principal of Product Compliance for CoreLogic the threat of a 100-year flood sounds ominous, but in reality the term means that any one area has a 1% annual chance of a 100-year flood event occurring in any given year.
This term, and its relationship to Federal Emergency Management Agency (FEMA) Special Flood Hazard Areas have resulted in misunderstanding of the federal regulatory flood insurance safety net (the mandatory purchase of flood insurance) which requires owners of mortgaged properties in these special zones to purchase flood insurance for the life of the loan.
“It is not uncommon for a homeowner to acknowledge that their home is in a “100-year floodplain” and still purchase the property,” Giberson said. “This language could easily lead some prospective buyers to surmise that if the area in which they purchased a property flooded 30 years ago, that it will not flood for another 70 years. However, these owners are sometimes caught unprepared by not understanding the actual risk of living in the floodplain.”
And due to oncoming effects of global warming, the example above is not an atypical scenario; it is imperative to employ policies, services, data and technology, and effectively engage with property owners in these floodplains to dispel the myths surrounding the safety net of mandatory flood insurance policies so everyone can come to a clearer understanding of flood risks.
The first myth that needs to be dispelled is that buildings in 100-year floodplains will only flood once every 100 years. Facts show that over the course of a standard 30-year mortgage, homes in these areas have at least a 26% chance of flooding. Furthermore, National Oceanic and Atmospheric Administration (NOAA) data over the last 10 years recorded more than 40 rainfall/flooding events described as once-in 500-year events Some states even reported once-in-1,000-year events.
The second myth is that needs to be dispelled is that if my mortgage lender does not require flood insurance, so you don’t need it. Mortgage lenders only comply with a minimum federal requirement that is the definition of the Special Flood Hazard Area. There have been multiple efforts over the past years to alter or expand these requirements, but currently, FEMA and the U.S. Department of Housing and Urban Development (HUD) are currently working together considering regulatory changes which could expand the definition of a Special Flood Hazard Area to cover larger geographic areas reflecting significant flood risk.
The third and final myth that needs to be dispelled is that if your mortgage lenders does not require me to purchase flood insurance, then I am fully protected even if there is a rare, once-in-a-lifetime flood. The federal mandatory flood insurance purchase requirement is a minimum standard intended to ensure that at least a baseline amount of protection is in place. However, this minimum may not be sufficient for homeowners to rebuild or recover after a disaster.
As covered by the National Flood Insurance Program (NFIP), the program only provides $250,000 for residential homes, well below today’s average home value. Furthermore, the cost of flooding often extends beyond repairing damage to the home.
“The Mortgage Industry Standards Maintenance Organization (MISMO) recently released a Flood Risk Disclosure Guide intended to inform homeowners about the seriousness of flood risk,” said Giberson. “Not only does the initial risk present a substantial cost that is worth proactively mitigating, but under the NFIP’s rating methodology, the cost of flood insurance may increase considerably with each claim payment, resulting in potential affordability concerns.”
“Importantly, the federally mandated purchase of flood insurance is intended to reduce the impact of uninsured flood losses on taxpayers by relieving the reliance upon FEMA federal disaster assistance following a flood,” Giberson continued. “Like any safety net, this mechanism is designed to catch a certain population, covering mortgaged buildings in the highest-risk areas with a minimum amount of flood insurance. But this backstop does not catch all property owners.”
“Today’s federal safety net is only a minimum,” Giberson concluded. “But by understanding that this is just a baseline, it becomes possible to focus on improving the safety net by expanding its reach and improving the way that we assist those outside of the net through information and education.”