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ASFMRA Annual Meeting October 28, 2009. Appraisers, Lenders, and Flood Insurance. Appraisers, Lenders, Flood Insurance. Federally regulated lenders are subject to requirements of the National Flood Insurance Program (‘NFIP’). FEMA clarified it’s flood insurance guidelines in 2007.

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asfmra annual meeting october 28 2009
ASFMRA Annual MeetingOctober 28, 2009

Appraisers, Lenders, and Flood Insurance


Appraisers, Lenders, Flood Insurance

  • Federally regulated lenders are subject to requirements of the National Flood Insurance Program (‘NFIP’).
  • FEMA clarified it’s flood insurance guidelines in 2007.
  • Lenders are responsible to determine if a building is, or will be, located in a Special Flood Hazard Area (‘SFHA’).
  • Flood determination is made prior to loan origination.
  • If a flood determination is made on the property and any portion of the property lies in a FEMA-defined flood zone, then the loan is “designated”.
  • Lender must provide notice to landowner if the collateral is in a SFHA; this applies even if the collateral is “land only”.
appraisers lenders flood insurance
Appraisers, Lenders, Flood Insurance

FEMA Flood Hazard Zone Designations

  • Mandatory flood insurance is required on buildings situated in Zones beginning with A or V. These areas are highly susceptible to flooding.
  • Zones B, C, and X are areas lying outside of the 100-year floodplain or protected by a levee. Flood insurance is not mandatory within these areas.
  • Property must be in a community that participates in the NFIP for mandatory purchase requirements to apply.

Appraisers, Lenders, Flood Insurance

  • If the property (collateral) lies within a SFHA:
    • The building(s) location in relation to the SFHA determines compliance. Some portion of the building must be in a flood zone; not just the site.
    • If a building is within a flood zone, and a lender has a security interest in that building, the lender must require the purchase of flood insurance.
    • Each affected building must have a separate flood insurance policy.
  • The amount of required flood insurance is based on the “Insurable Value” of the affected building – not it’s market or contributory value. The term “insurable value” is defined by FEMA.
appraisers lenders flood insurance5
Appraisers, Lenders, Flood Insurance
  • How much flood insurance coverage is required?

FEMA regulations stipulate it’s the lesser of:

  • The outstanding loan principal balance, or
  • The maximum available under the NFIP, which is the lesser of:
  • The maximum available for that type structure, or
  • The “insurable value” of the structure. By FEMA’s definition, “insurable value” is 100% Reproduction Cost New.
  • However, for farm/ranch buildings, it is the:
  • Functional Building Cost Value – what appraisers know as Replacement Cost New.
  • Demolition/Removal Cost Value – use if building would not be replaced in event of loss.

Appraisers, Lenders, Flood Insurance

  • If a building is within a SFHA and a NFIP- participating community, here are options:
    • Demolish it.
    • Property owner purchases adequate insurance.
    • Lender force places adequate insurance.
    • Release the building as collateral.
    • Appeal FEMA for reclassification of the site. This may require a professional survey with base elevations in support of request.
  • If required, there is a 45-day period for the borrower to obtain evidence of adequate insurance. Otherwise, flood insurance must be force placed by lender.

Appraisers, Lenders, Flood Insurance

Bottom line – What’s on your subject property?

Be certain about buildings and flood hazard areas

before a landowner has to insure or demolish this…