HUD Mortgagee Letter 2009-37- Flood Zone Requirements and Responsibilities of FHA Mortgagees and Appraisers

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

HUD seems to be on a roll lately with issuing Mortgagee Letters as they’ve issued yet another recent communication, Mortgagee Letter 2009-37 dated October 1st, covering the topic of flood zones and flood insurance responsibilities.

Flood Certifications Early in the Loan Process- a Must for all Brokers and Bankers

HUD’s letter actually brings forth a topic I wish to point out to be taken into consideration by all mortgage brokers and bankers. It’s important that you utilize a flood zone determination vendor within your organization and that you require the pulling of flood certifications early in the processing of each loan application file. It’s not smart to wait for the appraiser or end lender to make the flood determination for the subject property and ultimately the loan requirements for your borrowers.

You are doing a major disservice to your customers by not working proactively to determine the flood plain status of the property as soon as possible in the loan process. You may think you’re an expert on knowing whether or not a property is actually zoned to require flood insurance when in fact, unless you have an “in” with the municipality’s building or zoning board or with the Federal Emergency Management Agency (FEMA), you can’t possibly know everything for certain.

There’s nothing more frustrating to a borrower than learning at the very last minute that the property they are wanting so badly to purchase is in a flood zone because of some small body of water that overflowed 80 years ago and that they need to shell out hundreds of dollars for a flood insurance premium and additional escrow reserves in order to close on their dream property. I’ve seen these things happen to many times and each situation ends with a very unhappy borrower.

However, if you pull the flood certification early on and it comes back showing the property in a flood zone, you at least have the time to do further investigating if needed and have the opportunity to explain the whole situation to the borrowers. When they’re given sufficient time to understand and handle the application and premium, they are much less combative and end up much more appreciative.

When attempting to determine what flood cert vendor to do business with, keep a couple of things in mind. First, check to make sure the vendor is accepted by the majority of your end lenders. Second, check pricing and see if you are able to negotiate bulk discounted rates. If you are able to guarantee the vendor all or a major portion of your flood cert business, they will be much more likely to bring down their standard pricing for you.

And lastly, make sure the flood cert ordering process is an easy one for anyone in your office who will be responsible for requesting and reviewing the flood certifications. Ask if the flood certs can be ordered electronically, if there is interfacing available between the vendor and the loan origination software program your office uses regularly. Be sure to check out each vendor thoroughly to make the best decision for your staff and your customers.

The Appraiser’s Responsibility

The recently issued HUD bulletin explains that the appraiser is responsible for reviewing the applicable FEMA Flood Insurance Rate Map (FIRM) to determine whether or not the property lies within a FEMA-designated flood plain. If indeed the map reveals that the property’s location is within a flood zone, the appraiser is to include a copy of the map panel with the appraisal report. In addition, the appraisal itself must include the appropriate notation as to the flood zone designation, the map panel number and date of the map.

The Mortgagee’s Responsibility

Ultimately, HUD holds the lender responsible for making the correct final flood zone determination and for the meeting of all requirements. This is why no broker or lender should rely solely on the appraiser’s review of the FIRM map as the only method of determining the flood status of the property. Mortgagees are responsible to inform borrowers of the requirement to obtain adequate flood insurance for properties where any portion of the dwelling, related structures or equipment are located in a SFHA. In addition, as a condition of closing, the Mortgagee must require up front payment of the first year flood insurance premium and an escrow account for payment of future premium payments when they fall due. Also, it’s important to note that if the property is located in a SFHA and insurance under the National Flood Insurance Program (NFIP) is not available in the community, the property is not eligible for FHA mortgage insurance. This is why the review of a third party flood zone certification is vital early in the processing of each loan application.

Flood Insurance Requirements for Existing Properties Determined SFHA

For properties over one year old (as determined by the date of certificate of occupancy or equivalent), flood insurance must be available to the community and must be maintained for the life of the loan. If the flood zone determination is ever amended by a LOMA (letter of map amendment) to state that the property is no longer considered to be in a flood zone, the flood insurance may be dropped. However, in retrospect, if FEMA amends the flood zone status of the property at any point during the duration of the loan to state that the property has been added to a SFHA status, the servicing lender may contact the borrower to state a requirement for the borrower to obtain and add acceptable flood insurance for their loan. (I have seen this happen on numerous occasions).


Flood Insurance Requirements for New and Proposed Construction Properties and Manufactured Homes Determined SFHA

If any part of the property improvements is located within a SFHA, the property is ineligible for FHA UNLESS:


• FEMA provides a final Letter of Map Amendment (LOMA) or final Letter of Map Revision (LOMR) removing the property from SFHA in which case no insurance would be required; or

• Lender obtains a FEMA form 81-31 elevation certificate prepared by a licensed engineer or surveyor documenting that the lowest floor/finished grade of the residential building is built at or above the 100 year flood plain in which case, flood insurance would still be required.

The only case where flood insurance is waived is when a Letter of Map Amendment (LOMA) or Letter of Map Revision (LOMR) is issued by FEMA specifically removing the subject property from the flood plain status.

In cases where an elevation certificate is obtained in lieu of a LOMA or LOMR, you will need to make sure your end lender will accept such. Most lenders actually require the LOMA or LOMR regardless of the fact that HUD will allow an elevation cert with evidence of flood insurance.

Flood Insurance Requirements for Condominium Homes Determined SFHA

If the condominium unit or project is determined SFHA, the homeowners association (HOA) is responsible for maintaining adequate flood insurance. If the HOA does not maintain flood insurance and rather holds the unit owner responsible for maintaining flood insurance on the unit, the loan is not eligible for FHA.

Flood Insurance Coverage Requirements

You will want to consult your end lender’s guidelines to be certain their requirements do not vary from standard requirements which state that flood insurance must be obtained and maintained in an amount at least equal to the least of:
• The outstanding principal balance of the loan(s); or
• The maximum amount of the NFIP insurance available with respect to the property improvements; or
• The development cost of the property, less estimated land cost.

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)