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Heavy Rains, Heavy Costs:
Unraveling Flood Insurance
Trends and Challenges

Industry Insights

One trillion dollars. That’s the cost of flood-related damage to homes and businesses since 1980, according to Curbed. With climate change driving the rise of disastrous storms, it’s time multifamily lenders, owners, and operators understand the complicated world of flood insurance.
HappyCo explains.

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A recent Curbed piece strikes down the idea that the best climate change responses should prioritize wind energy or mass transit. Rather, writer Patrick Sisson argues: “the front line of climate change policy” needs to revolve around “how we deal with, plan, and pay for catastrophic flooding exacerbated by changing weather patterns.”

Yet, Val Marillion, Managing Director of America’s Wetland Foundation, touches on a fundamental disconnect in priorities when environmentalism and real estate coincide. Marillion cites a survey suggesting “only about 50% of Americans express concerns about climate change…but 100% express concern about maintaining their property value.” Indeed, Houston realtor Bill Baldwin makes clear that location may still trump safety when he reveals: “I’ve had clients who bought a home recently in Kingwood that had six feet of water in it. They want to be close to the grandkids…They don’t think it’s going to happen again in their lifetime.”

Still, Congresswoman Maxine Waters highlights the devastating — and widely-felt — consequences of these extreme storms when she describes flooding as a “humbling and equalizing force.” Not surprisingly, Waters has helped advance legislation to renew (and revise) the National Flood Insurance Program.

Before highlighting the specifics, HappyCo unravels the complicated world of flood insurance, revealing the latest trends and enduring challenges.

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Growing risk, minimal protection:
a sobering trend in flood insurance.

town soaked


A June 2019 Housingwire piece sets the stage with an alarming statistic from FEMA — that 90% of all natural disasters involve floods. To this end, FEMA announced a goal in 2017 “of doubling the number of flood policies nationwide by 2023,” according to a recent piece in the New York Times. However, as of March 2019, FEMA’s progress was far from significant; the agency had increased the total by just 3.4 percent.

By the time Hurricane Dorian struck this month, for example, the New York Times reported: “only 13 percent of the 1.9 million single-family homes in the United States at risk of flooding…have federal flood insurance.” Writer Christopher Flavelle suggests “two persistent challenges” are driving this disparity. The first, according to Flavelle, is “a continued reluctance by homeowners to buy flood insurance as climate change gets worse, even when they live in areas designated as having high risk.”

Additionally, Flavelle argues: “a second challenge is that flood threats are now increasingly outside the government-designated risk zone.” Assuming that they face slim odds of serious damage, homeowners in the latter group “are less likely to buy coverage.” Thus, it’s valuable to break down key aspects of flood insurance as owners, operators, and lenders see an increase in devastating storms across the U.S. — and must decide how cautiously to respond.

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Flood insurance basics: understanding what’s required.

power pole

Naturally, requirements are the first thing to understand in the realm of flood insurance. As Housingwire notes, “people with federally backed mortgages in areas located on 100-year floodplains, as designated by FEMA, are required to buy flood insurance.” Importantly, a recent FEMA study suggests the areas within these bounds will “grow by 40% to 45% by 2100 because of climate change.”

Bisnow highlights the same trend, revealing in an August 2019 piece: “new mapping technology combined with past storm history has led to more properties being designated as in flood zones, increasing the number of properties in need of flood insurance.” Writer Tierra Smith goes on to describe the fundamentals of flood insurance, detailing how “claims can cover the costs to repair the structure, the costs to repair or replace the contents, furniture, equipment, inventory or anything else of value that is identified on the contract.”

trash heap


Still, Curbed suggests that the federal initiative designed to protect communities in precisely these ways — the National Flood Insurance Program — is “both taken for granted and relied upon too much.” As writer Patrick Sisson argues, “many homeowners ignore the requirement to buy insurance through the NFIP — and the government does little to enforce the mandate.”

Yet, FEMA media relations specialist Rita Egan warned Vermont Public Radio recently: skirting these coverage requirements and hoping on a federal disaster declaration can spell significant financial consequences. VPR authors Jane Lindholm and Ric Cengeri describe how “the people who were impacted by Tropical Storm Irene in 2011…received an individual grant averaging $5,000 and $6,000.” However, as Egan emphasizes: “a national average to repair your home when you have about…one inch of water in your home, is about $25,000 to $26,000.”

Beyond offering much stronger financial protections than a government disaster declaration, the revised federal flood insurance policy backed by Rep. Waters would also offer considerable flexibility. The measure includes a ‘continuous coverage’ provision allowing “borrowers leaving the program to purchase private flood insurance to return to the NFIP without penalty.” Additionally, it allows the government to “offer umbrella policies for commercial properties, including multifamily and agricultural properties.”

However, when multifamily owners do take the plunge and purchase flood insurance, it’s critical that they understand key limitations to coverage.

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Grasping the limitations: flood insurance pitfalls.

broken fences

Bisnow makes clear that the National Flood Insurance Program “covers most commercial buildings for up to $500k in protections.” Yet, as Allied Orion Group partner Kirk Tate stresses, “while a typical commercial insurance policy covers business interruption, the federal insurance program doesn’t include income loss protection.” Bisnow elaborates on the impact for multifamily owners and operators, noting: “if an apartment building was flooded and the residents had to move out for an extended period, the loss of income would be substantial while the property was repaired.”

Loss of income isn’t the only downside when it comes to flood insurance policies. With global warming spurring even more disastrous storms, insurance rates and deductibles are starting to change for the worse, according to Bisnow. Author Tierra Smith describes how one Houston property faced a 40% increase in its rate in 2019, and that many other companies are seeing spikes of at least 15%.

Indeed, Bisnow notes that things changed dramatically after Hurricane Harvey left $125B in damage and dropped over 33 trillion gallons of water on Houston and Harris County in 2017. Now, as Smith writes, “if a property had $10M in coverage before Harvey, the carrier may want to renew at $2.5M or less.” Surprisingly, Smith admits: “developers Bisnow talked to in Houston said this isn’t halting planned developments, and property owners expect to swallow the rate increase and carry on.”

However, the evolving nature of flood zone designations may put a wrench in developers’ — and sellers’ — financial aspirations. HappyCo explores why these zone updates are beginning to change the nature of real estate conversations, with Houston as a starting point.

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Transparency on the rise: new flood zone legislation.

man with supplies

Houston Public Media reports that, during Hurricane Harvey, the majority of homeowners in Houston didn’t know their properties were at risk. Lawmakers in the area pushed to change this dynamic, and their efforts bore fruit this month. Since the first of September, “prospective buyers will receive additional details about a property’s flood risk when a new state law goes into effect, requiring more information on the updated seller’s disclosure form.”

Under a new law, homeowners will have to disclose if their property is “wholly or partially in the 500-year floodplain, a reservoir or a flood pool.” As Houston realtor Bill Baldwin stresses: “we’re going to have to do a better job of explaining…We’re just going to start talking about ‘Do you know where the reservoir is? Do you know what a floodplain is? Do you know what a flood pool is?’”

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As Baldwin explains to Houston Public Media, the legislation forces a greater level of disclosure than ever before: “If you got a foot of water on the property but it didn’t get into the house, now we’re having to disclose more than ever. Wouldn’t you want to know if the water got four inches from your door?” To be sure, buyers will have a stronger foundation to make big decisions.

However, the Texas Tribune makes clear what this bill means for sellers. Writers Lara Korte and Connie Hanzhang Jin explain: “according to data from the city of Houston, the majority of structures impacted by Harvey were outside of the 100- and 500-year floodplains.” Thus, as Korte and Hanzhang Jin note: “while it does mean homebuyers will be better-informed about catastrophic risks, it also means current owners could be forced to take unforeseen losses when they decide to sell.”

Having covered the changing nature of flood zone designations, it’s useful to understand how sea level rise is affecting the lending side of multifamily.

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As sea levels rise, how is lending changing?

soaked highway

CNBC contributor Diana Olick cuts to the quick in warning just how significantly sea level rise could affect the home loan sphere. At the top of her January 2019 piece, Olick stresses: “a foreclosure crisis spurred by climate change is becoming a real threat to the mortgage industry as extreme storms and other natural disasters increasingly occur in places where borrowers might not have flood or fire insurance.”

Olick turns to Ed Delgado, CEO of a national mortgage trade association, who stresses: “if we look at the basic foundation of what drives the mortgage market, it is the application of credit risk. What’s missing is the understanding of weather risk and where those weather events can take place.” Olick argues the current mortgage market takes a “reactive” approach, such as a “temporary moratorium on foreclosures,” a strategy that doesn’t “include plans for the widespread effects of climate change.” This, she argues, could “affect several major housing markets at once.”

minivan water


Indeed, in the case of Hurricane Harvey, Barron’s notes that “mortgage-delinquency rates on homes in the Houston area started off low, at just 1.9%.” However, by January 2018, “delinquencies on storm-damaged homes had climbed above 6%” and “surpassed “5% for homes that FEMA didn’t designate as damaged.”

Given these troubling financial signs, Olick suggests there was only one reason why Houston’s housing market didn’t face a dire fate in the end: “strong investor demand.” Olick describes how “after the storm, investors swarmed the market, offering troubled homeowners an easy way out, largely in cash.” However, she notes that Delgado views Houston differently — as a “wake-up call to the rest of the nation…specifically because the damaged homes were largely not in FEMA flood plains, and were therefore not required to have flood insurance.”

Insurance Journal highlights one more lending consequence as sea level rise brings increased flooding risks. Author Don Jergler argues: “climate change implications include potential credit rating downgrades for coastal municipalities.” Inside Climate News dives into the specifics, quoting Rob Moore of the National Resources Defense Council. He refers to Moody’s 2017 warning to local governments: “what they essentially laid out was, when you have a disaster and that affects your property tax revenues, that’s going to affect your credit rating.”

With lending concerns covered, it’s critical to gauge how eco-friendly design and development strategies can reduce risk ahead of major storms.

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The complement to insurance? Eco-friendly design.

soaked town

Coastal Florida is as great a starting point as any to consider these possibilities. Keys Weekly notes a range of strategies real estate developers can use to protect shoreline communities from significant water damage. They include: developing designs “for water storage with permeable surfaces and stormwater collection…integrating water in parks and mixed use developments” and growing “green infrastructure assets like…natural canopies, native grasses and dunes.”

Additionally, Keys Weekly turns to Will Langley, president of the Key West Association of Realtors, who advocates raising roads, establishing one-way flow valves, and elevating homes and commercial property. Langley suggests a communal approach to flooding risks is the best path forward — and he’s far from pessimistic. “As the Florida Keys, we are all in this boat together, from insurance companies to renters to homeowners to bankers to real estate. I think we have the opportunity to be the leader in the world on this.”

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Multifamily veterans and newcomers alike have much to consider in the realm of flooding risks and related insurance. To ensure resident safety and prevent significant financial loss in the event of a devastating storm, multifamily owners and lenders, as well as single-family homeowners, should consider available insurance coverage and premiums, required disclosures for sellers, and eco-friendly design options.


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In a climate change era… you want rock-solid Due Diligence!

As climate change brings more and more devastating storms and rising seas, now is the time to transform your property acquisition process! Learn why HappyCo’s Due Diligence solution can speed up walks and improve budget accuracy as you consider a coastal property.

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About the author

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Glennis Markison
Content & Webinar Producer

Glennis is a writer/producer from San Francisco. Taking the city’s trains and buses with riders of all ages and backgrounds inspired Glennis to go into journalism and share people’s stories for a living. After graduating from Johns Hopkins University in 2013, she worked at CBS San Francisco as a program coordinator, public affairs producer, and ultimately full-time news writer for the KPIX 5 Morning News. She’s excited to enter the bustling startup world and tell HappyCo’s stories across channels.

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