The Consumer Financial Protection Bureau (CFPB) has issued a new report that found significant differences in the likelihood that homeowners with a mortgage are adequately insured against flooding, based both on location and on income and assets. According to findings, homeowners in coastal areas were most likely to have flood insurance and generally had higher incomes and assets, suggesting that they were the best positioned to recover from flooding. Homeowners living near inland streams and rivers, however, were less likely to have flood insurance and less likely to have other financial resources to draw on to recover from a flood. The report uses a sample of mortgage applications from 2018-2022.
The CFPB’s report examines flood risk in the southeast and central southwest census regions of the United States, as measured by flood risk data from both the Federal Emergency Management Agency (FEMA) and the First Street Foundation.
FEMA’s assessment of flood risk is retrospective and focuses mostly on coastal flooding, while the First Street Foundation data better identifies inland flooding as well as having a forward-looking measure of flood risk. The analysis shows that the flood risk exposure of the mortgage market is more extensive and more geographically dispersed than previously understood. Homeowners can have significantly different access to insurance and therefore sharply different financial outcomes based on whether their risk of flooding comes from the coast or from inland rivers, streams, rainfall, and stormwater flooding.
Key Findings
- Current flood insurance maps may not capture accurate flood risk exposure. FEMA flood insurance maps rate flood risk highest in coastal areas, while First Street’s estimates predict significantly more exposure in inland areas as well as broader exposure in coastal regions.
- More than 400,000 homes may be underinsured for flooding events in the southeast and central southwestern parts of the country alone. The majority of flood insurance is provided through the federally subsidized National Flood Insurance Program (NFIP), which uses the FEMA flood insurance maps to identify properties eligible for flood insurance. Homeowners with a mortgage are therefore likely to be underinsured for flooding if the FEMA flood insurance maps do not accurately measure future flood risk.
- Homeowners who may be underinsured for flood risk also are least likely to be able to self-insure and recover from flooding. Borrowers in inland areas at risk of flooding, as identified using the First Street flood risk model, had lower incomes, and put less money down to purchase their homes compared to homeowners not in inland flood areas. This included both borrowers living in areas at elevated risk of coastal flooding and borrowers whose homes are not in an area of high flood risk, as identified either by FEMA or First Street. This suggests that these borrowers have the fewest financial resources to recover from flooding and are most at risk of suffering catastrophic loss after a flood.
Click here for more on HUD’s report on U.S. flood insurance.
