While the threat floods pose to the home finance system is well documented, the mortgage industry may not fully comprehend the risk with the data it looks at, according to a new paper from the Consumer Financial Protection Bureau.
In a comparison of data used by
"The analysis shows that the flood-risk exposure of the mortgage market is more extensive and more geographically dispersed than previously understood," CFPB wrote.
The CFPB looked at data for Southeast and Central Southwest geographic regions, meaning the number of underinsured stretching across the country is likely much higher.
The limitations of the data used by the NFIP account for the underestimate of vulnerable residents at risk, many of whom may not apply for flood insurance when not required, the bureau continued.
"Because the majority of flood insurance is provided through the National Flood Insurance Program, the owners of these at-risk properties may not have flood insurance coverage and must either self-insure unless they purchase optional federally subsidized or private flood insurance," the report said.
The effect of a large segment of underinsured homeowners may endure longer and prove costlier to housing markets than many foresee, according to Kingsley Greenland, director, mortgage risk analytics at Verisk.
"Underinsurance represents a material risk to certain pools of loans," he wrote in a statement to National Mortgage News. He also said the insurance industry also historically minimizes mortgage losses from weather events.
"If insurance support is unavailable or insufficient, the risk is materially higher than what's assumed at underwriting," Greenland wrote.
While there may be less risk for flooding in inland communities, the NFIP's coastal focus also doesn't fully provide an accurate overview of the types of threats to the mortgage industry, CFPB said.
Approved borrowers in higher-risk NFIP-designated coastal flood zones tend to skew older and hold higher credit scores than mortgage holders found in other potentially impacted areas inland. The coastal borrowers also tended to have high incomes, qualifying them for larger loan amounts. They often to put more money down at purchase.
On the other hand, borrowers in nonmandated, but still at risk, inland areas made smaller down payments and reported lower credit scores and income at time of purchase.
"Because of differences in flood risk measures, the analysis suggests significant gaps in flood insurance coverage in noncoastal flood zones and that applicants in those areas are less likely to have the financial capacity to self-insure and are potentially more at risk of their mortgage becoming over-leveraged," CFPB said.
Hurricanes Helene and Milton, which both struck the Southeastern U.S. in fall of 2024, illustrate the disparities between FEMA and First Street analyses. Some of the hardest-hit counties were located in the interior of Georgia and North Carolina.
The federally funded NFIP, the only provider of flood insurance for many borrowers in high-risk areas, also regularly finds its capacity to serve them jeopardized during government-shutdown battles. The program has received
Without overhauls, the increase in NFIP debt could lead the U.S.
