CFPB Finds Properties May be Underinsured in Non-Coastal Flood Zones

Homeowners with mortgages who are at risk of flooding from rivers and creeks are more likely to be underinsured for floods than coastal residents, according to a new report from the Consumer Financial Protection Bureau.

Using a sample of mortgage applications from 2018-22, the CFPB found that homeowners in coastal areas were “most likely to have flood insurance and generally had higher incomes and assets, suggesting that they were the best positioned to recover from flooding,” a press release said.

The report examines flood risk in the Southeast and Central Southwest census regions of the United States by using flood risk data from both the Federal Emergency Management Agency (FEMA) and First Street Foundation, a nonprofit research and technology organization.

The CFPB’s analysis determined that the flood risk exposure of the mortgage market is “more extensive and more geographically dispersed than previously understood.” Data suggests that roughly 440,000 properties — around 6 percent of the CFPB’s sample of mortgages — may be underinsured for flooding events.

“This analysis finds significant gaps in flood insurance coverage in non-coastal flood zones and that applicants in those areas are less likely to have the financial capacity to self-insure,” the report said.

Large differences between FEMA’s National Risk Index and First Street’s Flood Factor model, compared to the Special Flood Hazard Area designation, suggest that many at-risk properties are not being properly identified, the report said.

Most flood insurance is provided through the National Flood Insurance Program (NFIP), which uses FEMA maps to identify properties eligible for flood insurance. Homeowners with a mortgage are likely to be underinsured for flooding if the FEMA flood insurance maps do not accurately measure future flood risk, the CFPB said.

Related: FEMA Maps Lead to Development in Flood-Risk Areas, NC State Study Shows

An example of this is Appalachia, which covers western North Carolina, eastern Tennessee, eastern Kentucky, southwestern Virginia and all of West Virginia. Flood Factor estimates show that counties in the region have “significantly higher flood risk,” the CFPB reported, but most of the areas are not in FEMA special flood hazard areas and, therefore, do not have coverage available through the NFIP.

“In other words, property owners in these areas are identified as being at risk of flooding but likely to be underinsured with respect to flood risk,” the report said.

CFPB also highlighted differences between Flood Factor’s flood risk identification and the National Risk Index. Flood Factor indicates “significantly more flood risk than NRI in some of western Maryland, south Florida and Louisiana.” Meanwhile, NRI identifies more flood risk in northwestern Maryland, near the Chesapeake Bay, compared to Flood Factor.

“Overall, there are significant differences in flood risk identification across the two measures,” the report said.

Inland borrowers in areas at risk of flooding, as identified using the First Street flood risk model, also had lower incomes and put less money down to purchase their homes compared to homeowners not in inland flood areas, the CFPB reported.

This included borrowers living in areas at high risk of coastal flooding and borrowers whose homes are not in an area of high flood risk, as identified either by FEMA or First Street.

“This suggests that these borrowers have the fewest financial resources to recover from flooding and are most at risk of suffering catastrophic loss after a flood,” the press release said.

The full report can be found on the Consumer Financial Protection Bureau website.

Topics
Flood
Homeowners