Scenario: We want to make a second mortgage/heloc on a property in a flood zone. We are not the 1st mortgage holder. Do we require flood insurance only on the amount we lend or must we require flood insurance for all liens/loan amounts up to the insurance limits? I'm confused about our responsibilities.

Your answer is yes, the insurance must sufficient to cover both the 1st and 2nd mortgages. The Mandatory Purchase of Flood Insurance Guidelines addressing this on page 28. add the balance of both mortgages together to get the total amount owed on the property. Flood insurance must be required for the total amount of both loans or the maximum amount available. Also, only 1 policy can be written on the property, meaning that the coverage will need to be increased on the policy in effect. The logic behind requiring sufficient coverage to cover the 1st and subordinate mortgages is that if the 1st mortgage holder did not require the coverage, and the new policy only covers the amount on the 2nd loan, in the event of damage the 2nd lien holder's interest is not protected.

Thanks for the reply.

Here's an excerpt from our Advanced Lending manual on Flood Insurance:
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Second Liens:
Lenders must ensure that the borrower has enough flood insurance to support all liens on improved property located in a Special Flood Hazard Area (SFHA). For example, if a building: 1) is located in a SFHA; 2) secures a $20,000 second lien loan; 3) is valued at $100,000 exclusive of land value; and 4) has a $60,000 first lien against the same property, the second lien lender must require the borrower to obtain a flood policy in the amount of $80,000. The limit on the amount of flood insurance is the value of the building or the maximum insurance available under the National Flood Insurance Program (NFIP), whichever is less.

If the first lien holder is another lender and the first lien loan amount is covered by a flood insurance policy with FEMA, to get insurance for the second lien, the second lien holder must request that it be added to the first flood policy and the amount be increased to cover the total amount needed. Only one policy is written by FEMA for any one building to be insured.

Insurance claims paid on a flood policy are paid "in lien status priority order." Consequently, in the illustration above, if a flood insurance policy was written by FEMA for the $20,000 second lien amount only, any settlement amount paid out would go to the first lien holder on record.
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Excellent. Is it possible to get a copy of this manual?

I won't try to speak for David, but I will say that his company sells the manual he is quoting from. As a vendor he may be hesitant to speak to much about it. You should be able to get info on it from his site. I too hope to be a user soon.

I had thought that by asking him enough questions we'd get most of it here on BOL, but it going to slow.

I really appreciate all of the input. David, when you say FEMA will pay out in lien status priority order and the first lien holder on record will be paid first - I need to know what record? Say Bank A has 1st lien=$60,000 with no flood insurance. Bank B has 2nd lien=$40,000. Bank B requires $40,000 insurance. Since FEMA has no policy for the 1st lien at $60,000, would they pay the 2nd lien based on their insurance policy (which only has the 2nd lien insured) or would they pay in status order based on liens recorded without respect to who is on the insurance policy? This is a question that was asked of me and I just need to make sure.

Well, as the second lien holder you are required by the regulations to ensure that the borrower has enough coverage to satify both the first and second lien. So - this should be a moot point.

The first lienholder of record is the first one properly recorded. From a seminar I attended - first gets paid first, no matter if they are listed on the policy or not.

Thanks, but then what is the incentive for the first lienholder to require the insurance. If they are going to be paid, why not let the second bank deal with the insurance? (playing devil's advocate is something I cannot stop doing)

I don't think they would want to explain to regulators or board of directors why they didn't require the proper flood insurance.

****Warning**** Rant ahead!

The incentive for the first lien holder is that their collateral is likely to disappear. Banks get lulled into the sense that we get flood insurance because it's required "by a regulation". Well, that not the real reason. The real reason you get flood insurance is because your collateral is in jeopardy. I've heard a million stories about this or that property being in a flood zone and "it'll never flood there". Well, I have news for you - they don't just make this stuff up. They have sound historical information that says the likelihood of the property flooding "again" is high. The Houston area found out the hard way during the 100 year rain out of Tropical Storm Allison when they got 40 inches of rain in 24 hours. There were homes not even in the 100 flood plain destroyed. Don't let anyone convince you that:"things like that never happen here".

How about monetary penalities for violating the law.

I'm trying not to belabor the point, however, if the 1st lien holder is going to be paid anyway because his lien was recorded first, what's the point? "Getting flood insurance because its required by the regulation" is exactly on point and I can see some management types attempting to argue with a regulator that if we get our money back regardless if we required the insurance or not on our 1st lien, we're covered.

I'm on board with all of you, but you all can understand the types of questions we get in our profession!

What are they now - $350 a piece. I would be more concerned with $250,000 in collateral washing down a gully. I would almost bet you that the chances of that happening are greater than your regulator slapping you with a CMP.

You're exactly right in that it should be the concern for your collateral. Your post just above mine wasn't there when I said how about monetary penalities. We must have been posting about the same time.

Also, how does the first lien holder know if there is a second mortgage with anoher FI, and if that FI got the insurance required?

The whole point of the flood insurance regulations is not so, from a bank perspective, "we get our money back". It just shows the total misconception of the whole program. The point is that the borrower is covered and the feds don't have to bail out the borrowers - it has nothing to with protecting the lenders. The only way they could think of forcing homeowners to buy this stuff was to involve the federally regulated lenders. If it was only the lenders that they were concerned about, they would require us to carry a blanket insurance policy or be self insured, like many banks now do for vehicle insurance to get out of the insurance tracking business.

Also if the first lienholder doesn't require the insurance then they don't get paid. Why would the customer buy it if it wasn't required? Very few do purchase insurance on their own. Flood insurance also saves taxpayers money in some cases from paying out relief if the area is designated a federal disaster area.

Well, nobody has ever accused the general public of being smart. But I'm in a flood zone and I have it - not because a lender makes me either. I don't necessarily want to bet the value of my house against mother nature.

Anonymous, in an earlier post you indicate that "first gets paid first whether they are on the policy or not". That's what I'm trying to get to. Which is it? I myself understand the concept. However, I'm involved in a debate. It is understood that the insurance is necessary/required, etc. If we as the 2nd lien holder do one of two things, we would be fine:

1. Do whatever it takes to get added to an existing policy with enough coverage for our loan or:
2. If there is no existing coverage, require the borrower to obtain the coverage.

The issue under debate is, what the 2nd lien holder's responsibility is in terms of the amount of coverage required. Is it only for the amount of the 2nd lien or does the coverage have to include all loans in effect? What I'm being hit with is the lenders here feel their responsibility is limited to the amount of the 2nd lien only and who cares about the 1st lien? So if the collateral is lost, the borrower loses but the 2nd lien holder does not. Their view does not consider borrower protection.

Devonne,

David Dickinson and Anonymous answered your question regarding the regulatory responsibility of a 2nd lien holder in the first few responses.

Banks are required to verify proper coverage for all real estate loans up the maximum required. If the Bank is third mortgagor, there must be enough coverage for the first, second and third so everyone gets paid. I hope this helps.

Thank you all for all of your input. I agree with your assessments but I was thinking (out loud) of the arguments I've gotten over this and I did not intend for my comments to appear to be "overkill".

Thanks again.

Wow! I miss a day and looks what happens while I'm away. I think that dpersfull said it best with:

In reply to:

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Also, how does the first lien holder know if there is a second mortgage with another FI, and if that FI got the insurance required?

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And what if the 2nd is paid off. Then the 1st is out again. I can't see any reason a 1st lien holder would not get FI and expect or hope that another lien holder would take care of the responsibility. DeVonne is correct that FI is not to protect the lender. It is designed to protect the federal government. What a joke.