Late spring is a memorable time for most. Green grass, budding trees and spring flowers brought about by warmer temperatures ushering in summer. Unfortunately, spring memories for many include the remnants of northern melting snows and those “April Showers.” In a year-to-date already filled with significant weather advisories and hazards, the Northeast and the upper and lower Midwest are now experiencing flood issues.
Weather related events coupled with an already economically impacted housing market will no doubt also affect the ability for many seniors to remain in their homes as we move into summer. Particular attention is needed when considering the subject property flood zone determination and the existence of a federal disaster declaration.
In December 2010, FHA issued additional guidance and changes to its Flood Zone Requirements. Mortgagee Letter 2010-43 provides new guidance on FHA Flood Zone requirements and updates Mortgagee Letter 2009-37. FHA now requires that all Mortgagees obtain a flood zone determination on all properties instead of strongly encouraging such action. In addition, FHA is now consistent with the Coastal Barrier Resources Act (CBRA) by prohibiting FHA Mortgage Insurance for properties located within designated coastal barriers.
The new guidance contained in this Mortgagee Letter is as follows:
• A notice that any property located within a designated Coastal Barrier Resource System (CBRS) unit is not eligible for an FHA- insured mortgage. • A requirement that Mortgagees obtain life-of-loan flood zone determination services for all properties that will be collateral for FHA-insured mortgages.
If any portion of the property improvements (the dwelling and related structures/equipment essential to the value of the property and subject to flood damage) is located within a SFHA, the property is not eligible for FHA mortgage insurance unless additional documentation, certification, elevation and/or mapping requirements and conditions are provided per guideline and subsequently approved.
The Mortgagee is responsible for determining if a property is located in a special flood hazard area (SFHA) as designated by the Federal Emergency Management Agency (FEMA). The FHA appraiser is required to review the FEMA Flood Insurance Rate Map, note the FEMA zone designation on the Uniform Residential Appraisal Report (URAR), and if the property is located in a SFHA, attach a copy of the flood map panel. Mortgagees are required to obtain life-of-loan flood zone determination services independent of any assessment made by the appraiser.
Prior to closing, Mortgagees must inform borrowers of the requirement to obtain adequate flood insurance as a condition of closing for properties where any portion of the dwelling and related structures and equipment are located in a SFHA. Flood insurance premiums must be included in the escrow along with taxes and hazard insurance only if escrow is required for those items, and evidence of satisfactory coverage in effect with premiums paid must be provided prior to closing. The actual cost of obtaining flood zone determination services may be passed on to the borrower.
Mortgagees and servicers must assure the borrowers maintain adequate flood insurance during the life of the mortgage. Insurance must be obtained if the Mortgagee or Servicer becomes aware that the building involved subsequently becomes part of an SFHA due to a Flood Insurance Rate Map (FIRM) revision. Mortgagees are required to force place flood insurance if the borrower allows the policy to lapse or if the coverage is found to be inadequate.
For more detailed information on flood zones and flood insurance requirements, consult Mortgagee Letter 2010-43.
What do you do when your property is not in a flood zone and is part of a federal disaster declaration by FEMA (Federal Emergency Management Agency)?
Generally, for appraisal reports that have been completed, lender appraisal policies for properties located in Federal Disaster Areas where assistance to individuals and households is being provided by FEMA require a “Property Inspection or Condition Report” with photos (interior and front/back exterior) if the property is located in a new or existing Federal Disaster Area prior to closing.
While sources for the property inspection or condition report may vary by lender typically, the inspection may be provided by any reputable source such as:
• Appraiser • Licensed Contractors • Home & Building Inspection Services • Insurance Inspectors • Flood service damage verification report services • Bank Attorney/Title Closing Agent (if closing held in borrowers home)
The inspector must certify the following: • The property is free from damage and (if re-inspection or re- certification) is in the same condition as previously appraised. • The property maintains the same marketability and value as originally appraised.
The declaration of a Federal Disaster Area may remain in effect for months after the actual occurrence of the event. It is important to be aware of prior declarations when reviewing appraisal reports.
New appraisal reports completed after the disaster declaration should be reviewed in detail to determine any damage or repairs needed resulting from the disaster as well as appraiser specific comments relating to the existence of the disaster declaration.
Key to the acceptability of the appraisal report and property is the pairing of the life of loan flood zone certification, the appraiser comments and the overall effect the disaster had on the marketability and value of the subject property.
A common mistake is to assume that condominium units above the first floor are not subject to flood insurance requirements or, in the case of a federal disaster declaration, subject to re-inspection guidelines. The additional measures undertaken to ensure the property has not been damaged by the effects of the disaster is both a borrower safeguard and safety and soundness measure for the Lender and FHA.
Our hearts and thoughts go out to those individuals affected by weather related and natural disaster events.