Proposed FEMA flood rule could have big lender implications

by Rachel.Norvell10 Nov 2014
Mortgage professionals that lend money for residential properties near water could see new regulations in regards to flood insurance coverage.

FEMA has proposed a new rule, which specify that property owners in flood-prone areas would be required to have their insurance premiums automatically set aside in escrow accounts, satisfying the requirement that borrowers from federally regulated lenders have and pay for flood insurance. Proponents say the regulation would also help homeowners pay those bills on time.

Additionally, some flood insurance policyholders may find themselves no longer required to carry the expensive coverage for certain portions of their property.

FEMA’s proposal would eliminate the requirement to purchase flood insurance for structures that are part of a residential property located in a special flood hazard area, if that structure is detached from the primary residential structure and does not serve as a residence.

The escrow requirement would affect new and refinanced loans made after Jan. 1, 2016.

Flood insurance has been under high scrutiny since 2012, when the Biggert-Waters Act — intended to stabilize the floundering National Flood Insurance Program — led to steep premium hikes of up to 1,000 percent.

The legislation caused a backlash among both policyholders in flood-prone areas, as well as the insurance producers representing them. Fearful for the stability of the housing market, Congress rolled back the increases in premiums to become more gradual.

NFIP has been under financial strain since the 2004 and 2005 hurricane seasons brought in more than $16 billion in losses. Another $7.8 billion from Superstorm Sandy in 2012 made protecting the program, which covers 5.3 million consumers and businesses, even more essential.
 

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