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Flood Insurance Softens Blow to Lenders

40% of homes in New Orleans are federally insured for flooding

September 9, 2005


photo of Paula Parisot
Paula Parisot

Mortgage lenders are obligated to require borrowers on properties in designated flood zones to obtain federal flood insurance, and many of the devastated homes in New Orleans are covered.

As water drains from streets in the Big Easy, damages -- which some analysts predict might reach $100 billion -- can be further assessed. Irreparable water damage is eminent for most homes located in the basin area of New Orleans recently ravaged by the flood waters of a failed levee.

By law, federally regulated mortgage lenders are required to ensure that houses located in a designated flood zone have and regularly renew flood insurance for the lesser of $250,000, the maximum amount of available coverage, or the outstanding principal balance of the loan less the land value, according to the U.S. Federal Emergency Management Agency.

About 40 percent of homes in the city that lies below sea level have flood insurance, Insurance Information Institute Vice President Loretta Worters told MortgageDaily.com. Worters explained that mortgage companies should not be affected too much by the housing losses as a result of Hurricane Katrina because the National Flood Insurance Program would reimburse them.

The Mitigation Division, a component of FEMA, which manages the National Flood Insurance Program, reported as of December 2004 there were 83,900 active flood insurance policies in New Orleans, representing almost $12 billion worth of coverage. The median yearly premium for those policies is $519.

"Most of the damage in the New Orleans area will be from flooding," Worters said. "If part of the damage is sustained from (hurricane) winds and partly from flood both homeowners insurance and the NFIP would pay for it."

Despite being a government subsidiary, the program states it is "self-supporting for the average historical loss year, which means that operating expenses and flood insurance claims are not paid for by the taxpayer, but through premiums collected for flood insurance policies." But it does have "borrowing authority from the U.S. Treasury for times when losses are heavy" and noted that the loans are paid back with interest.

Secondary housing agency Freddie Mac has enabled servicers of single family loans it manages secured by properties in FEMA designated disaster areas to return September's mortgage payments and suspend payments for September through November. "This temporary suspension will apply to every borrower with a Freddie Mac-owned single family mortgage in these FEMA designated zones, regardless of the condition of their home," Chairman and CEO Richard Syron said in an announcement Thursday.

Freddie said borrowers will still be required to make all mortgage payments after the suspension period ends.

The McLean, Va.-based company, which manages a $1.6 trillion portfolio, said after the suspension period and until December's due date, "servicers have the discretion to continue suspending or reducing payments on Freddie Mac-owned mortgages for an additional nine months on a case-by-case basis, depending upon each borrower's specific circumstances."

In addition, servicers were advised not to report any reversed and suspended payments to credit bureaus and to cease all late fees, collection and foreclosure activities in the storm-affected areas during the suspension period.

Paula Parisot is a MortgageDaily.com feature reporter and a blogger at CloserBlog.com who has also worked in the mortgage industry.

Email Paula at: [email protected]

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