Closing a Loan During National Flood Insurance Program NFIP Lapse

One would think after5 months of negotiating a short sale and the buyer is locked and loaded and ready to close…that one should be able to close on the property. Well unfortunately it is not so. We recently had a short sale stopped in its tracks the day of closing due to the National Flood Insurance Lapse. It is like being put into a holding after at 16 hour flight from half way around the world.

So what happened?

Congress recessed without extending authority for the National Flood Insurance Program (NFIP), which expired on March 28, 2010. By law, flood insurance is required for the purchase of real estate in a 100-year floodplain. However, insurers may not issue new or renewal policies or increase the coverage of existing policies backed by the NFIP while it’s expired.

Six of the nation’s largest lending authorities have issued guidance to administer the federal flood insurance regulations during the current National Flood Insurance Program (NFIP) program lapse. Although each lending authority notes considerations, the consensus is, in most cases, loan closings may still occur during the NFIP lapse.

To move forward, the lenders need verification that an NFIP flood policy application was submitted along with a premium payment sent to the insurance provider. Lenders should follow all normal flood risk evaluations prior to closing, and they should create new follow-up practices to make sure there continues to be full compliance once Congress reauthorizes the NFIP program.

Lenders should become familiar with and follow the specific guidance offered by their lending authority.

When Congress returns on April 12, NAR will push to extend the NFIP and the reauthorization retroactive to March 28, 2010, so that any properties flooded during the lapse will be covered.

Background information

Congress recessed without extending authority for the National Flood Insurance Program (NFIP), which expired on March 28, 2010. By law, flood insurance is required for the purchase of real estate in a 100-year floodplain. However, insurers may not issue new or renewal policies or increase the coverage of existing policies backed by the NFIP while it’s expired.

FEMA, which administers the NFIP, issued guidance that:

• Existing flood insurance policies that were in effect on March 28 (when NFIP expired) will remain in effect and would not be affected.
• While new flood policies may not be issued after that date, new policies for which payment was received – or in case of loan closings, the application was dated on or before March 28 – will be issued.
• Renewal policies may not be issued until the NFIP is extended; however, there is a 30-day grace period during which the policy remains in effect following its expiration date.

Buyers may also “assume” the seller’s existing policy without having to re-issue it (NFIP Manual, Page GR 15: (http://www.fema.gov/pdf/nfip/manual201005/03gr.pdf). The page says:

“D. Assignment: A property owner’s flood insurance building policy may be assigned in writing to a purchaser of the insured property upon transfer of title without the written consent of the NFIP. Policies on buildings in the course of construction and policies insuring contents only may not be assigned.”

The purchase requirement for flood insurance may also be fulfilled with non-NFIP policies backed by private insurance companies. These polices, however, can be expensive and limited to only certain states. Lloyd’s of London, Chubb and AIG have offered such insurance.