It’s Not In Banks’ Best Interest To Look Too Closely At New Flood Plain Maps

For the last few years, the folks at the Federal Emergency Management Agency have been issuing more accurate flood plain maps at the same time as the government has made a renewed push for mortgage lenders to help make sure homeowners who need flood insurance are actually purchasing it. But even though these new maps should be making it more clear to everyone whether or not one’s home is in a flood plain, the banks appear to be playing fast and loose with the rules in order to force customers into more expensive insurance policies.

See, while part of your property might be in a Special Flood Hazard Area, that doesn’t necessarily mean you need to purchase flood insurance. The insurance is only required if your actual house falls within that zone.

So if your house is far from that lake, creek or river or is high up above the area that could flood, you should not have to purchase the insurance. Problem is, as these new maps get around, banks are taking only cursory glances at them and not always checking to see where a house might be before deciding that flood insurance is needed.

Usually, banks give homeowners 45 days to provide proof of insurance. After that, the bank will just put you into a policy of its choosing — one that is often significantly higher in price than what you’d pay if you bought it yourself.

Homeowners can appeal to FEMA, though that process will likely require 60 days. By that time, they will have either needed to find their own insurance or be placed into one by their lender.

Additionally, many homeowners are just as unaware of the specifics of flood insurance requirements as the banks appear to be. Thus, when the letter comes from their lender, they just assume it is accurate.

While three of the nation’s largest banks — Bank of America, Wells Fargo, and JPMorgan Chase — say they don’t accept commissions on forced-place insurance, many lenders do get a large chunk (upward of 20%) as incentive for getting homeowners into the required insurance. It should be noted that Chase only stopped the practice in 2010 after it was sued for allegedly enriching itself via forced-place insurance.

Reps for the banking industry claim lenders are not out to line their pockets with these commissions.

Whether or not the banks’ mistakes on forced-place flood insurance is a money grab or a genuine misunderstanding, the number of appeals to FEMA has skyrocketed in recent years. Last year, the agency received nearly 36,000 such appeals, a 55% increase from only three years before.

We’ve written before about the danger to homeowners and the housing market of banks pushing borrowers into pricy forced-place homeowners insurance policies. At least in those cases, the banks were purchasing insurance policies that actually needed to be bought.

Lenders’ mistakes cost homeowners on flood insurance [StarTribune.com]

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  1. Coffee says:

    They’d be much quicker to update their database if we just designated everything as a flood plain. Think outside the box, people.

  2. fsnuffer says:

    Why should I buy flood insurance? If there is a flood, there will be senators and congressmen tripping all over themselves to throw FEMA dollars my way. If the winds on Long Island ever get above 25 MPH Chuck Schumer will get FEAM to declare LI a disaster zone.

    • nickmoss says:

      If you are ever in a flood, you might understand. The FEMA money of which you speak is 90% low interest loans.

      I have collected on my flood policy about every 4 years for 20 years now. My cabin gets 4 feet of water in it, FEMA gives me $45-50K each time and I pay about $3-4K each time for the clean-up. Best money maker around.

      • Cor Aquilonis says:

        Good job on taking advantage of the public purse. /s

        Why not just take what you need?

        • nickmoss says:

          Because I have to take what they give me. No choice in the matter.

          What makes this even stranger is that the independent, contracted appraisers hired by FEMA are paid a percentage of the claim. It is in their own best interests to make the claim as high as possible.

          I also bear no ill will at the sarcasm. If FEMA wants to give me the money, it is my patriotic duty to take it. Maybe they will have to take it out of the TSA budget, as both are part of DHS.

    • Cat says:

      Declare LI a disaster zone? A little late for that.

  3. nickmoss says:

    You are entirely wrong in your explanation of flood insurance policies.

    All flood insurance is funded by FEMA, even those policies that are issued by Write Your Own (WYO) companies. There is a 30 day waiting period before the policy takes effect, unless it is a requirement for obtaining a mortgage. All lending institutions require this insurance if the house is in a Special Hazard Area. You cannot get a mortgage without it. There is no 45 day grace period given by the banks.

    All flood insurance is issued at the same rates (set by the federal government), no matter if issued directly by FEMA or by a WYO company. There is no way a bank can charge any higher amount. While this may be true with fire/homeowners/etc., it cannot be done with flood insurance.

    Please do some research on the FIRM maps and the HUD rules before making assumptions.

    • He says:

      Then why do I get different quotes on flood insurance from different companies? I was put into an AE flood plain after FEMA drew a gerrymandered flood plain map which appears to be based on topology from 1970 and my available prices varied by $1000/year.

      • nickmoss says:

        All insurers must use the same FIRM to set rates. If a WYO company misread the map, shame on them. Go with the lowest number.

        Been there. Done that.

  4. dragonfire81 says:

    “Reps for the banking industry claim lenders are not out to line their pockets with these commissions.”

    My BS detector just exploded.

  5. Purple Elmo says:

    It’s more difficult when the FIRM is erroneous. Then it is up to the homeowner to obtain a Letter Of Map Amendment from FEMA and have the house area removed from the hazard zone. The process requires that a licensed surveyor document the elevation of the lowest corner of the structure. This documentation forms the basis of the request. The fee of the surveyor will depend on how much work must be done to verify the elevation. Modern GPS technology can reduce the cost if the surveyor has the equipment.

  6. AzCatz07 says:

    As an agent, I recommend flood insurance to any homeowner, whether or not you’re in a flood zone. If you’re in a low-hazard area, the coverage is very affordable , and it covers things your standard homeowners policy excludes. I pay about $200 a year for mine, and it’s worth it for my peace of mind.

    • icerabbit says:

      Of course you recommend it …

      • nickmoss says:

        I also recommend it. It a storm drain down the street gets clogged with debris and the water backs up into your house, your homeowner’s policy will not cover the damage. You should also get sewer back-up coverage, as neither homeowners or flood insurance will cover this hazard.

        Cheap peace of mind.

    • AustinTXProgrammer says:

      $200/year when my house sits on the highest part of my lot with tons over lower non flood plain land around me would be $200 wasted. But I did at least give it a long hard thought before deciding not to bother with a quote. If I were 3 houses down the street I would do it.

  7. GitEmSteveDaveHatesChange says:

    Is it flood plain, or flood plane, as it’s a line on two dimensional map that shows you an areas to be wholly covered?

    • nickmoss says:

      It’s flood plain. There are three definitions used in a Special Flood area. Flood way, flood plain, and flood fringe. These areas get the highest premiums.

  8. crap it's jenn says:

    Oh the joys of flood insurance and FEMA. My city was hit by a massive flood just over a year ago. Those who weren’t directly in the flood area or on the “fringe” had been told years ago by their insurance agents that they didn’t need flood insurance. So many new home owners didn’t purchase it, people who had it cancelled it. Now they’re fighting the state and FEMA for assistance. Many had to walk away from their homes because they couldn’t afford the mortgage they were already paying on top of the SBI loan they needed to take to repair it. Or they were flat out told they had to demolish the house because it was deemed condemned, but wasn’t in the buyout area. I know many people who are currently paying a mortgage on an empty lot because they were told they “didn’t need flood insurance”.

    FEMA assistance may take years for some people to get. Also, any other grants, ect that you may get…yeah, that money that FEMA said you were going to get? You’ll get less and less depending on how much assistance away from them you receive.

    Hundrededs of thousands of dollars of loss could have been avoided if people would have just kept paying approximately $400 a year for insurance.

  9. icerabbit says:

    Owning property that is waterfront and set back far enough from the 100yr flood line, faithfully insured with homeowner and separate flood insurance policy, and, having been hit wind damage and water all inside my house due to the roof being partially removed by a hurricane … They can take a hike. Biggest insurer within the US denied things and low balled left and right. Minimal payout that only covered part of even the proven structural damage.
    Since then they’ve threatened to leave he state, but since they’re still here, they now charge 10% of your house value. Yes. 10% of land plus structure value. Goodbye insurance.

    • icerabbit says:

      PS: Any additional assistance offered by FEMA was in the form of a low interest repair loan.

    • nickmoss says:

      If you are in an beachfront area, then the V factor comes into play with flood insurance. Wind velocity in those areas is not covered by homeowners. If you had a mortgage on the property, HUD would have made the bank get the appropriate flood coverage.

  10. lemortede says:

    Who can tell me how to appeal a a FEMA flood plain maps?
    I have been trying to get through the red tape but keep getting the run around.

    • Sudonum says:

      Usually your county government has to appeal. You need to put pressure on your county officials to push it. It also might be too late, there are time frames for appeal. In my Parish (county) the local government did a mass robo call to let residents know that there were open meetings with FEMA and Parish officials to discuss the maps. In my case we showed that FEMA and the Corp used outdated elevations to determine the flood zone, the Parish fought it on our behalf (we had every home owner in the subdivision raising hell with the Board and the Parish President) and FEMA revised the maps.

      • nickmoss says:

        The county is a good start. They can let you know if you need to go to another govermental entity instead. It all depends on the state.

        In the original 13 states, where the laws are quite different on water rights, in many caces it is townships, boros, and villages that have the flood plan for the area.

  11. icerabbit says:

    Yes, wind factor is pretty major as well as storm surge.

    In many cases now you have very few options for coverage any more. With a take it or leave it stance from the insurer.

    The latest round of policy renewals this year represent a 50% rate hike around us. One would need a $300 inspection to prove that your house is built solidly and would stand the test of time. The thing that frustrates me with that is that a solid 50yr old block house with old growth roof framing in which you can’t even hammer a nail will not be insured by some carriers; who will only cover new construction younger than 25yrs … a lot of which has been really cheap construction.