Recently a client asked me about Black Knight teaming up with ServiceLink to deliver Flood Zone Determinations. The client was surprised when I said that the digital integration between these flood services and loan origination systems was only part of the story. Black Knight is ahead of the curve in our work to support our origination clients – but also our investor and servicing clients – through what TIME magazine warns as the “climate real estate bubble.”1
Flood Impacts to Real Estate and Mortgage
It’s important to keep in mind two fundamental data-driven observations when talking about flood impacts to the real estate and mortgage industries. First, natural disasters are occurring on a more frequent basis and they are becoming increasingly expensive. According to the Pew organization, “physical damages and economic losses from flood-related disasters in the United States have risen by more than $100 billion every decade since the 1980s.”2
The increases in natural disasters and their costs are particularly unsettling given the second data-driven observation: significantly more properties may be susceptible to flood damage than previously thought. How many more properties? Models from the non-profit First Street Foundation indicate nearly another 6 million households currently have the substantial 1% annual risk level on top of what FEMA already has classified for 8.7 million properties.3
According to a recent New York Times article “New Data Reveals Hidden Flood Risk Across America,”4 there has long been a concern that federal flood maps underestimate flood risk. Changing atmospheric conditions can be the reason for this underestimated flood risk. As a data professional, I can empathize with the enormity of the time-consuming and complicated task of maintaining an accurate and up-to-date dataset that serves as the foundation for those flood maps. Some experts indicate that a heightened flood risk exists today, and federal flood maps need to be updated to reflect that risk.
A Different Political Climate
The Congressional Research Service indicates that “FEMA is planning to introduce the biggest change to the way the National Flood Insurance Program calculates flood insurance premiums, known as Risk Rating 2.0, since the inception of the NFIP in 1968.”5
The policy makers are signaling, however, not just a different regulatory landscape. Efforts are intended to protect what could be a growing and collective threat to the U.S. economy as flood-prone areas face a diminishing tax base when home prices in those areas drop. The bipartisan Flood Resiliency and Taxpayer Savings Act currently in the U.S. House of Representatives speaks to those flood-prone areas and how federal funding should respond.
In the context of house prices dropping and mortgage activity subsequently decreasing in flood-prone areas, Michael Craig, an economist at the Department of Housing and Urban Development, states “Potentially, we’re looking at a wave of mortgage defaults that would be similar to the subprime crisis in how it would play out.”6
Brian Deese, Director of the National Economic Council for the Biden administration and former head of sustainable investing at BlackRock, similarly indicates “The degree of capital reallocation and the speed of that is going to be larger and happen more quickly than most market participants expect.”7
Impact and Action
A Stanford analysis of two decades’ worth of sales data and flood-risk data suggests that almost 4 million U.S. single-family homes in floodplains are overvalued by an average of $11,526 per house – totaling nearly $44 billion. If that type of valuation impact is extended to the increased number of properties expected to be already at flood risk, then the challenges could be even greater.8
So, what happens when federal funding for flood maps increases and the number of properties designated with a flood risk grows by 30%, 40%, or more than 60%? What is the course of action lenders, investors and services should take to prepare for this and the corresponding potential for decreased valuations?
Solutions to Help You Prepare
Black Knight recognizes the importance of having a simplified process to manage, administer and maintain life–of–loan Flood Zone Determinations. To address the need for simplification, Black Knight offers a unique opportunity – conversion of a lender’s current portfolio at no additional charge – even if the initial flood zone certifications were conducted by other vendors. This no-cost conversion aspect was essential to include in the Black Knight flood offering because we know the challenges and expenses our customers have faced previously when using multiple vendors for their flood solutions.
Additionally, lenders who use Black Knight’s EmpowerⓇ and other loan origination systems – appreciate the pay-at-close model Black Knight offers so flood certifications are not charged on mortgage fallout, leading to significant cost savings.
Black Knight also strives to provide our clients with greater insights. The ServiceLink CertMapⓇ we offer includes an aerial display of property structures in a flood zone. This aerial visualization is valuable for communicating where a property resides – in or alongside a flood zone – as well as clarifying more complex situations, like when a property with multiple structures, such as a house with a detached garage, has some structures inside a flood zone and others not.
While the familiarity and utility of the FEMA Standard Flood Hazard Determination Form (SFHDF) is included and serves its purpose, the CertMap is for those who expect their deliverables to be more than a standard-issue government form.
Knowledge is the Antidote to Fear
While the media issues a legitimate cautionary tale on the flood horizon, Black Knight believes that data and analytics can direct informed action. We are confident in the way Black Knight technologies come together with ServiceLink, which is one of the largest and most experienced flood certification vendors – completing over 30,000 flood certificates a day and tracking flood changes on over 34 million loans.
Contact us to find out how our flood services will help you be prepared for the potential tide – or tsunami – of changes that could be coming to property flood zone determinations.
- Worland, Justin. 2011. “The Climate Real Estate Bubble: Is the U.S. on the Verge of Another Financial Crisis?.” TIME, April 19, 2021. https://time.com/5953380/climate-housing-crisis/
- Pew.2020. “Pew Praises Bipartisan House Bill Aimed at Safeguarding Nations Communities From Flooding.” News release, September 30, 2020. https://www.pewtrusts.org/en/about/news-room/press-releases-and-statements/2020/09/30/pew-praises-bipartisan-house-bill-aimed-at-safeguarding-nations-communities-from-flooding
- First Street Foundation. https://firststreet.org/mission/
- Flavelle, Christopher; Lu, Denise. “New Data Reveals Hidden Flood Risk Across America.” New York Times, June 20, 2020. https://www.nytimes.com/interactive/2020/06/29/climate/hidden-flood-risk-maps.html
- Congressional Research Service.2021. “National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0.” June 4, 2021. https://fas.org/sgp/crs/homesec/R45999.pdf
- and 7. Worland, Justin. 2011. “The Climate Real Estate Bubble: Is the U.S. on the Verge of Another Financial Crisis?.” TIME, April 19, 2021. https://time.com/5953380/climate-housing-crisis/
- Stanford Woods Institute for the Environment.“Housing markets don’t efficiently factor in flood risk, researchers find.” April 23. 2021. https://youtu.be/n18s5kcE0So