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#2120968 - 03/08/17 01:08 AM Flood ins- use princ bal or insurable value?
M&M Offline
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We are trying to ensure we have adequate coverage force placed on a flood loan. I know we can use insurable value, but struggling with how to calculate it (and worried we'll not get it right). Or would I be better off using the outstanding principal balance of the loan? Would/could we be criticized for force placing too much flood insurance if we used principal balance of the loan and the value of the house is less than the principal balance?

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#2120973 - 03/08/17 12:45 PM Re: Flood ins- use princ bal or insurable value? M&M
rlcarey Online
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Would/could we be criticized for force placing too much flood insurance if we used principal balance of the loan and the value of the house is less than the principal balance?

Yes, you will and you might even get sued by the borrower. Determining insurable value for the force placement of flood insurance is a no different process than determining how much flood insurance they need if they were purchasing it on their own.
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#2121054 - 03/08/17 05:01 PM Re: Flood ins- use princ bal or insurable value? M&M
M&M Offline
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Thanks Randy. So, how do I calculate insurable value on this scenario? We have a loan secured by 2 properties: farmland valued at approximately $100,000 and a 1-4 family house valued at approximately $120,000. The current principal balance on the loan is $127,259.41. The farmland is not in a SFHA. The house is in a SFHA. We have force placed flood insurance on the house with a coverage limit of $91,000 because that is what is shown on his hazard insurance policy as the coverage limit.

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#2121351 - 03/09/17 09:37 PM Re: Flood ins- use princ bal or insurable value? M&M
David Dickinson Offline
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Don't consider the land (or any structure not located in a SFHA) when calculating insurance.
1. Loan amount = $217,259
2. Insurable Value = $120,000.
3. Max = $250,000 on a residence.

You need the "lesser of 3". Therefore, $120,000, but see the additional comments.

You mention "valued at approximately $120,000". You need to determine what the insurable value is - not the market value. Read the article entitled "Flood Insurance Insurable Value" at our website to help:
http://www.bankerscompliance.com/compliance-resources/free-downloads.htm
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#2123288 - 03/23/17 03:58 PM Re: Flood ins- use princ bal or insurable value? M&M
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I have a situation where we have 25 properties (residential), all in a flood zone. The admin used the appraisal in lieu of the hazard replacement cost as the amount of insurance required. Upon review of these calculations it was determined that by using the hazard replacement cost for the amount of insurance required the customer is now showing inadequate coverage by over $20,000.00 for each property. My question is: has anyone used the appraisal in lieu of hazard replacement cost when determining the Amount of Insurance Required?

Example:
Total loan amount: $1,143,800.00
100% replacement cost-$99,084.50
Max NFIP: $250,000.00
Amount of insurance required: $63,541.00 (which is from the appraisal)
Amount of insurance in place: $86,000.00

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#2123290 - 03/23/17 04:04 PM Re: Flood ins- use princ bal or insurable value? M&M
Norman Paperman Offline
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When you say appraisal, are you referring to a cost approach or market value? If I have the choice, I always go with the cost approach given in an appraisal as the appraiser has likely put eyes on the property and can make a better determination (after all, that is their job).

If you are talking about a market value, then I agree you have some problems to deal with.

Edit: I'm completely ignoring the figures you provided since it shows a $1MM loan and $80M in coverage...
Last edited by Norman Paperman; 03/23/17 04:06 PM.
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#2123314 - 03/23/17 05:52 PM Re: Flood ins- use princ bal or insurable value? Norman Paperman
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They used the cost approach it looks like however in determining the required amount of Flood insurance required they used the appraisal amount divided by the 25 properties and not the hazard replacement cost which is what we use today .....the replacement cost of the hazard in determining the amount of flood insurance required would leave the borrower inadequate coverage of over $20,000.00 for each property.


Is there ever a time where a lender would NOT use the hazard replacement cost as a determination for amount of insurance required? I've only known to use the appraisal in the event no hazard policy is available? If that makes sense.

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#2123319 - 03/23/17 06:05 PM Re: Flood ins- use princ bal or insurable value? M&M
rlcarey Online
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Since these are not primary residences, replacement cost is really irrelevant, you need the ACV. Additionally, you need the ACV for each individual building, otherwise you have no hope in calculating the proper amount of insurance. As far as using replacement costs from a hazard policy, even if you were going to insure to RVC, you would still have to analyze whether or not the hazard insurance replacement costs are dealing with the same things that a flood policy would insure, such as foundations.
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#2123514 - 03/24/17 04:42 PM Re: Flood ins- use princ bal or insurable value? M&M
David Dickinson Offline
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Central City, NE
As I stated in my March 9th post, I highly recommend reading the article entitled "Flood Insurance Insurable Value" at our website to help you understand this issue. We updated our website last week, so I'm going to post a new address to get to the article I'm referencing:
http://www.bankerscompliance.com
Click on "Resources" in the top menu bar and then scroll down to "Free Downloads". YOu'll find this article toward the bottom in the "Articles" section.
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#2123554 - 03/24/17 06:11 PM Re: Flood ins- use princ bal or insurable value? M&M
Norman Paperman Offline
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To support David's point, go read the article. It is very well said and sums up what many have said here. Randy and David have both schooled me on flood compliance, so its no surprise that their advice is the gold standard.
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#2123567 - 03/24/17 06:37 PM Re: Flood ins- use princ bal or insurable value? David Dickinson
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Thanks!

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#2124341 - 03/30/17 02:22 PM Re: Flood ins- use princ bal or insurable value? M&M
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I need more guidance on this.....getting some pushback.

The loan amount is 1,143,800.00 for 24 units and 1 house - total flood coverage is 1,901,000.00, hazard coverage is 2,512,676.00.

trying to understand what to use as the value but the appraisal did not break down the cost approach (no ACV) They used the total appraisal sales comparison approach of 1,560,000 divided by the 24 units – and they came up with $63,541.00, this value includes the land and in speaking with someone they feel that we should use this value - if we use the hazard coverage breakdown provided on each individual unit our calculation sheets would show inadequate coverage and Sue felt that this would be requiring excessive coverage.

It was suggested that we should break it down this way. -


Total flood 1,901,000 subtract the $109,000 (appraisal value of separate home – house) = 1,792,000 divided by 24 units - flood coverage amount per unit $74,666.67.

Total loan amount $1,143,800. Subtract the 109,000(from house appraisal) = $1,034,800.00 - divided by 24 = $43,116.67.

Since we have a policy on each unit it was suggested that we break the loan amount down and use the $43,116.67 as the amount of flood coverage required.

it was also suggested that we create a memo to place in the file explaining how we came up with the figures. Will this suffice?

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#2124346 - 03/30/17 02:35 PM Re: Flood ins- use princ bal or insurable value? M&M
Norman Paperman Offline
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Are these houses or condos or what? Take any argument for appraised (market) value and throw that out the window. It is completely useless.

Your options are to either obtain an ACV on each property in a flood zone (go back to the appraiser or pony up the extra to have it done) or get those values from the hazard policy. You could probably have the appraiser use a Marshall Swift book to ascertain an ACV. Whoever you are speaking to is wrong.

Edit:
Your worksheet should include the total loan amount, ACV value for each property, and the program maximum. Once you have those figures, use the below calculator that Dan Persfull created.

https://www.bankersonline.com/tools/151072

Last edited by Norman Paperman; 03/30/17 02:38 PM.
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#2124352 - 03/30/17 02:52 PM Re: Flood ins- use princ bal or insurable value? M&M
Norman Paperman Offline
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9 Properties in a SFHA
Each property is valued at $150,000 (ACV)
Loan Amount $1,200,000

Worksheet
Loan Amount: $1,200,000
ACV x 9 = $1,350,000
Program Max x 9 = $250,000 x 9 = 2,250,000

Lesser of the three above values = $1,200,000

This means that I need $1,200,000 in coverage over the nine properties. Each property must be insured for something, and in aggregate those totals must add up to $1,200,000. Let the customer decide the coverage, but they could insure 7 for the $150,000 and the remaining two for $75,000.

I add this in case you are getting hung up on the aggregate coverage and how to spread that out. In summary, the transaction must have the minimum coverage, how you spread it out is up to you and the customer.
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Maybe you just wanna fly the plane yourself. Well good luck pressing take off, then auto pilot, then land.


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#2124380 - 03/30/17 03:42 PM Re: Flood ins- use princ bal or insurable value? Norman Paperman
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They are townhomes in sections.

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