FHA exposed to $4.5 billion risk from flood insurance gaps: audit

The Department of Housing and Urban Development’s inspector general claims the Federal Housing Administration’s insurance fund was exposed to at least $4.5 billion in loans that didn’t maintain proper flood coverage in 2020, blaming oversight faults.

The amount is estimated to have been spread across 31,500 loans, HUD’s Office of Inspector General said in an audit released this week. The agency recommends the department update regulations and develop a control to track flood insurance compliance.

“FHA did not have adequate controls to detect loans that did not maintain the required flood insurance, and its handbooks did not clearly guide servicers on the flood insurance requirements,” the audit said.

HUD declined to provide written comments for the report, the audit said, and representatives for HUD didn’t respond to requests for comment Friday.

The finding comes as regulators increase scrutiny over climate change-related impacts on the housing market. WIth increased flooding raising insurance costs and depressing purchasing power, industry experts have called for vigilance in keeping up with flood map revisions and insurance compliance.

Borrowers in federally-designated special hazard flood areas, with a floodplain with a 1% or greater chance of a flood occurrence in any given year, can obtain coverage from the National Flood Insurance Program. Those policies cover $1.3 trillion across 5 million property owners, the audit states.

The IG examined 90 loans for its audit and extended those findings across its 197,747 mortgages in areas requiring flood insurance among its approximately 8.3 million loans. Within that sample, 21 loans had some form of insufficient flood insurance, with an estimated weighted average risk of $36K per loan. Across its flood insurance-affected portfolio, the audit calculated an average risk of $23K per loan.

Servicers weren’t required to enter flood insurance compliance information into HUD systems, the FHA said, and they didn’t report coverage information on defaulted loans.

“If HUD had servicers enter the necessary data into its system or had data from NFIP, edit checks would be the most practical way to address this issue,” the audit said.