Posted on 30 Aug 2012 by Neilson
New York area residents applying for mortgages to buy a new home or refinance an existing one are bumping up against a new obstacle: flood insurance.
Ever since the Federal Emergency Management Agency began redrawing the flood-zone maps in the greater New York region in 2007, some areas that were once considered low-risk have become high-risk. That has prompted banks and other lenders to require borrowers in the high-risk zones to buy insurance against hurricane or flood damage to their homes.
Initially, the new requirements mainly affected owners of single-family homes near coastal areas, including houses in Queens, Staten Island, Long Island and Westchester County.
But as FEMA continues to revise the flood-zone map, the changes are affecting more high-rise residential buildings in Manhattan, Jersey City and elsewhere around the region. The result is that some buyers and owners of condominiums and co-ops are finding that lenders are requiring that they, too, have individual flood-insurance policies or that their buildings buy heftier policies before obtaining a mortgage.
Renee Slas said she was "shocked and appalled" that Bank of America Corp. wouldn't fund her home loan when she attempted to buy her TriBeCa apartment earlier this summer. The rejection surprised her, both because her apartment was on the fifth floor, which seemed an unlikely location for flood damage, and because the building was already insured for natural hazards by Lloyd's of London.
But Ms. Slas says her lender would only consider a policy written by the National Flood Insurance Program administered by FEMA.
"I lived through Hurricane Irene and there was no flood damage on any of our streets," says Ms. Slas, a senior vice president at Estée Lauder, who had already been living in her one-bedroom apartment for four years. In the end, she switched to a different lender, which didn't require an NFIP policy.
Bank of America said the amount of commercial space in her building was the main reason Ms. Slas's loan request was denied. BofA spokesman Rick Simon also noted that lenders aren't required to accept private insurance when a property is in a high-risk flood area. He added that over the years, the bank has been following FEMA guidance about insurance policies.
FEMA spokeswoman Crystal Tramunti says Ms. Slas's case isn't unusual. Even when a co-op or condo building has flood coverage for the entire building, she said that if the mortgage lender believes the policy is inadequate, it "will require in some cases individual unit owners to take out additional insurance."
Currently, there are nearly 39,000 NFIP policies in force in New York City, up 41% since 2007. For condos or co-ops, the NFIP can insure individual unit owners who pay directly for their flood coverage or the entire building, which divides the cost among residents as part of the common charges. A full third of this year's policies were for condo buildings or unit owners.
Not surprisingly, the new designations of high-risk flood areas aren't sitting well with some residents, especially those who live high in the sky.
Terrence LeRay is a real-estate agent who tried to fight back when his bank required flood insurance on his 10th floor condo in Dumbo, Brooklyn. "I'm over 50 feet in the air," said Mr. LeRay. "But the bank said as long as my building is in the high-risk area, I have to be covered."
Mr. LeRay brought the issue to his building management, which bought a new, more-expensive policy for the entire building and added the cost to the condo's common charges.
Lenders say they're just playing by the rules. Since 1968, flood insurance has been required for properties in high-risk areas with mortgages written by federally regulated banks.
"What we see is a map from FEMA," said BofA's Mr. Simon. "If a property shows up to be in a flood plain, and there's no reason to believe the FEMA map is wrong, we require flood insurance."
On Aug. 21, FEMA announced building owners already covered under flood insurance could renew their policies at low-risk rates even if they were recently mapped into a high-risk zone. As a result, lenders will likely accept private flood insurance in lieu of NFIP more consistently, according to Mr. Simon.