CFPB warns of mortgages likely underinsured against flood risk

The CFPB yesterday announced a new report, Flood Risk and the U.S. Mortgage Market, which 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.

This report looks at 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 include:

• Current flood insurance maps may not capture accurate flood risk exposure.
• Over 400,000 homes may be underinsured for flooding events in the southeast and central southwestern parts of the country alone.
• Homeowners who may be underinsured for flood risk also are least likely to be able to self-insure and recover from flooding.