Flood risk awareness slowly growing: Fannie Mae

Consumers are getting better at recognizing that they need to do something about the risk that water damage from storms could pose to their houses, but many are still misinformed, Fannie Mae found in a newly released survey.

Last year, 28% of consumers took action to address the concern, up from 21% in the influential government-related mortgage investor's last survey, done in 2020. The percentage taking action corresponded with the risk in their area, but many had incorrect information about it.

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"Approximately 40% of those in high-risk zones and only 5% of those in medium-risk zones correctly identified their homes as located in those risk zones," Saif Amin, senior director, climate impact strategy, and Li-Ning Huang, principal market research, said in a blog.

The research could be setting the stage for mortgage lenders to distribute new documentation about the concern.

"Consumers want information about their current risk, and flood disclosures could help," the Fannie Mae researchers said.

A new protocol, such as requiring mortgage companies to distribute such information, would likely get a mixed reception unless it came at a manageable cost for all stakeholders and effectively improved consumer understanding.

If disclosures were added and centered on flood zones, they'd likely need to include a disclaimer related to their status as an imperfect measure of actual risk, in line with a recent report finding 40% to 50% of it lies outside of maps designating coverage areas.

Disclosures could help borrowers better protect themselves and servicers from damage to their properties that could hurt loan performance and the value of collateral if properly understood and acted upon. But implementation costs could be an issue.

The expense associated with managing flood risk is a growing concern that extends to the federal insurance program that's been a hot topic in congressional budget debates. It's also putting considerable strain on borrowers who live in flood-prone areas.

More than 40% of respondents to the Fannie Mae survey had significant concerns about premium increases during 2022 compared to 31% in 2020, with the average increase last year being just shy of $250. That's added to broader concerns about housing affordability this year.

"Recent insurance market trends have been unfavorable to consumers," the two researchers said.

Yet both the federal flood insurance program and private companies that write almost one-third of flood insurance policies have also been struggling particularly in areas that have a history of high risk. That's been true even if one of these areas had a relatively moderate hurricane season this year, like the Sunshine State has.

"Florida homeowners carriers generally benefited from significantly higher policy pricing which generated underwriting gains and contributed to modest surplus growth. However, sharply higher reinsurance costs dampened profitability for primary carriers," Kroll Bond Ratings Agency found.

One contributing factor to Florida's risk highlighted in a recent Wall Street Journal article has been the fact that although the state has known flood-risk exposure, builders have continued to use wood to construct homes there because it's more expedient than more storm-resistant concrete.

While Florida has had a relatively mild hurricane season, other regions have had a tougher year where flooding is concerned, with Vermont and Pennsylvania experiencing issues over the summer. The Keystone State recently established a legislatively mandated task force in response.