Question

How do you think Lending rules could pave way for private flood insurance expansion

will affect the housing market and eventually the economy?

Answer 1

According to industry experts, regulations released by a handful of federal lending regulators could help smooth out the way for private market flood insurance to further grow. Specifically, the final rule requires regulated lending institutions to accept policies which comply with the statutory definition of' private flood insurance' in the Biggert-Waters Act; and allows regulated lending institutions to exercise their discretion to accept flood insurance policies issued by private insurers and flood insurance plans issued by non-compliant mutual assistance companies

Apart from the federal NFIP system, supporters of a trade flood insurance sector see the drive to introduce legislation as beneficial for private flood coverage. Flood insurance is typically available for mortgaged homeowners in flood areas which are normally considered low-risk. It may even be available, depending on the type of loan, for mortgaged homeowners in high risk flood areas. Homeowners will however be required to purchase flood insurance if they take out a mortgage from a federally regulated or insured lender (such as a FHA mortgage) and buy a home in a high-risk flood zone (also known as a Special Flood Hazard Area). In most cases, the homeowner will be required to pay annually for flood insurance until the mortgage is paid off.

When someone takes out a mortgage, if the borrower stops making mortgage payments, the home serves as collateral. If buying a home, the lender often has a bigger financial interest in the property than the borrower. If floodwaters destroy one of the lender's properties, and the borrower leaves the home and stops making mortgage payments, the lender will be trapped in a losing position. A lot of lenders allow the homeowner to buy flood insurance to mitigate this risk.