Millions of Homeowners Could Lose Flood Insurance Soon — Here’s What Mortgage Lenders Need To Know

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After the National Flood Insurance Program was temporarily extended in September, the program is once again set to expire on November 17 — leaving borrowers and mortgage lenders in a tough spot. Read on to learn about the potential implications for the housing market and what mortgage lenders can do about it. 

What’s going on with the NFIP?

The National Flood Insurance Program (NFIP) is set to expire on November 17 — and it’s possible that Congress won’t reauthorize it. If that happens, the NFIP can’t sell new flood insurance policies, issue more coverage, or renew existing policies after they expire. This is really big news because the NFIP provides most flood insurance coverage in the US, representing about 5 million homes. Homeowners with federally-backed mortgages in high-risk flood zones, also known as Special Flood Hazard Areas (SFHAs), are required to have flood insurance coverage. 

What does this mean for borrowers?

Millions of homeowners in SFHA properties could be left without flood insurance coverage if the NFIP lapses — which means that homeowners are more vulnerable to floods and could be left to cover any damage on their own. Even worse, the lapse would come during the height of hurricane season when flood damage occurs more frequently. On top of that, prospective homebuyers could be unable to make new home purchases, since mortgage lenders may completely stop issuing new loans in some regions. The NFIP has lapsed before, and during previous incidents, borrowers couldn’t close, renew, or increase loans on SFHA properties until the NFIP was reinstated. 

What does this mean for mortgage lenders?

The potential lapse has some significant implications for mortgage lenders. It’s estimated that 1,330 home transactions could be lost daily, according to the National Association of Realtors. During the lapse in June 2010, approximately 1,400 home sale closings were canceled or delayed each day, representing over 40,000 sales per month. The loss of business could be a big blow to the mortgage industry, which is already struggling as interest rates remain high, mortgage demand is low and home affordability is putting pressure on the overall housing market.

What can lenders do about it?

Unfortunately, the mortgage industry relies heavily on the NFIP to get homeowners the flood coverage they need. The good news is that the NFIP has lapsed several times in the past and was reauthorized retroactively — so you may not be faced with this issue for long. In the meantime, there are a few things you can do while you wait for the program to be renewed:

1. Watch out for guidance from government entities like the FDIC and Federal Reserve. During past NFIP lapses, these agencies provided recommendations on how to continue conducting business without flood insurance in place and educate borrowers on their options.

2. If your borrowers have an upcoming policy renewal, let them know to take action before September 30. As long as the paperwork is received prior to the NFIP lapse and the premium is received within 30 days, renewal policies will likely be issued.

3. Consider referring borrowers to a private flood insurance carrier, though this option may not be available for everyone. If you choose this route, keep in mind that private carriers may not write new policies in high-risk flood zones. Check federal guidance to ensure compliance with requirements when using a private carrier (for example, the coverage should meet Minimum Property Requirements). Matic has partnerships with several private flood insurance carriers including Neptune, Geovera, EZ Flood and Palomar.

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