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Tighter Mortgage Requirements Opens Debate on Flood Insurance
By Mitch Traphagen mitch@eiherald.com
Apr 3, 2008 - 10:12:24 PM

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“There is at least one [property] presently affected and I’m sure there will be others,” said realtor Tom Sandersfeld, referring to the lack of available flood insurance in unincorporated Iowa County. Mitch Traphagen Photo

MARENGO – Everything appeared to be in order.  The seller was comfortable with the offer; the buyer was excited about purchasing a new home.  For realtor Tom Sandersfeld, it seemed to be another happy ending on the job.

Except for one problem.

The buyer of the acreage in unincorporated Iowa County was qualified for the purchase but the lender was worried nonetheless.  The property was in a flood plain.  To cover their bets, the lender added a requirement that flood insurance be purchased as a condition of the mortgage.

Unfortunately, Iowa County doesn’t participate in the National Flood Insurance Program and the cost of private flood insurance was too much for the buyer.  The sale fell through.
The National Flood Insurance Program was created not only to protect property owners and set guidelines to prevent future losses, but also to prevent situation such as this from occurring.  Short of a cash buyer or some form of exotic financing, that acreage could be difficult to sell.

“You can only sell it on contract - but the sellers couldn't do that because they wanted to buy another house,” Tom Sandersfeld said.  “They could sell it for cash but how many people have a shoebox full of money?”

In Iowa, 490 communities and 88 counties participate in the NFIP.  Iowa County is one of just 11 counties in the state that does not participate.

“When a community does not participate in the NFIP, it can potentially affect residents who are attempting to buy, sell or refinance real estate located in that community's special flood hazard area,” said Bill Cappuccio of the Iowa Department of Natural Resources.  “It also affects the ability of those residents to qualify for other benefits, including federal grants and disaster assistance.”

“I haven't seen any pitfalls, said Sandersfeld.  “I don't see any problems for farmers.  If you are going to build a building or a new house in a flood plain, you already have to have a permit from the DNR.  The extra side of it is that you'll also have to get someone from the county to look at it.”

Much of the property in Iowa County that is currently designated as a special flood hazard area is agricultural.  Sandersfeld queried Cappuccio about the potential impact the program may have on farmers.

“The regulations the community would adopt say that any development placed in the flood hazard area requires a permit,” Cappuccio replied.  “While a fence post does technically qualify as "development", I haven't heard of any flood plain managers ever requiring permits for them.  The intent of the regulations is to protect future development from damage by flood, and to ensure that development placed in the flood plain does not worsen flooding.  So, something like a fence post - which has no flood damage potential and wouldn't affect flooding – isn't a concern.  A building, levee or quarry stockpile in the flood plain would be a concern.”

The decision to participate in the NFIP is up to the Iowa County Board of Supervisors.  On Friday, Sandra Cox of the DNR spoke to the board during their regular meeting to discuss participation and to answer questions.  The board expressed an interest in the program.
From the county’s standpoint, there is paperwork involved in the application process, although the DNR does offer assistance with that.  Also, someone in the county must be appointed to oversee the program.

“I think it's a good thing for the county from what I've been able to find out,” Sandersfeld said.  “It just makes people more eligible for disaster type help should something happen.  That looks like an upside to me. “

For existing structures, the impact of the program would likely be minimal.  It is unlikely that any existing homes or buildings would have to be modified as part of the program.  If, however, a severe flood should occur, homes damaged in excess of 50 percent of their value may be required to be brought into compliance.

Currently, the city of Marengo participates in the program.  City property owners are able – but not required – to purchase flood insurance.  That decision is up to the mortgage holder and the property owner.  When Marengo entered the program, no homes were required to be modified for participation.

“I never thought it was an issue,” Sandersfeld said.  “I sold that house [the acreage] five or six years before and it wasn't an issue then.  Apparently lenders are getting tougher all the time - they are requiring more.  I don't think there will be a lot of people affected by this but there are some.  There is at least one presently affected and I'm sure there will be others.”

For those affected, it could mean being trapped in a home that would be difficult or impossible to sell.  And for everyone else, homeowners insurance rarely, if ever, will cover flood damage – the NFIP could bring peace of mind.



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