Flood coverage for multiple properties

If a loan has multiple properties as collateral, what is the proper way to calculate the required amount of coverage for each property?

I know the amount required is the lesser of the outstanding bal, RCV or max NFIP coverage.

So, if the loan balance is $400,000 and the RCV of the property is $28,000 (using $40,000 appraised value less land value of $12,000), and the max NFIP is $250,000.....amount required is $28,000.

In this scenario, there were 4 properties taken as collateral and the one used in the above example is in a flood zone.

Thoughts?

Only buildings in a SFHA should be used in the amount calculation. It doesn't matter if there multiple properties, if the others aren't located in a SFHA.

If the value of the building located in a SFHA is $28,000, then I agree with your answer: You only need $28,000 in flood insurance.

Okay...that's what I thought.

Now...another question. I am reviewing a file where the bank has used an outside vendor (WNC) to force place flood insurance. I am concerned that their method of calculating the required amount of coverage is incorrect.

For example, this is their formula (exactly as described by them in an e-mail):

Loan balance (multiplied by) known value of property = percentage of loan the collateral holds.

Percentage of collateral (multiplied by) loan balance = the required amount of coverage.

The loan balance is $424,394.77.
The appraised value of the property in a SFHA is $40,000, which represents 7%. $424,394.77 x 7% = $29,707.63

My calculation is $28,000, theirs is $29,707.63 - which is MORE than what is needed, which essentially means that the borrower is being overcharged for FP insurance.

Am I right?

I have no idea where they come up with their method. You are correct that WNC is incorrect.

You can require more insurance then the minimum (as long as it isn't more than the insurable value), but how they calculate makes no sense to me.

Not that I question your answer at all, but knowing that I am going to be asked for proof, do you have a cite for the fact that properties not in a SFHA are not included in the flood amount calculation? I have not had a lot of luck finding anything official. Thanks in advance for any assistance.

I'm not sure that you are going to find it in black and white.

Properties outside of the flood zone don't count. They are discounted just as the land value is when it comes to the properties in the flood zone.

Lesser of:

Loan amount, insurable value of improvements in the SFHA, or maximum insurance amount available. The same formula applies.

Thanks. I think we've resolved the confusion on our end with a vendor calculation. I appreciate your response.

I believe I know the answer based on the previous discussion, but would like for someone to verify that with me, please.

We have a loan with four commercial properties, two of those properties are in a SFHA.

Loan Balance - $386,000
Property 1 in SFHA RCV - 300,000
Property 2 in SFHA RCV - 215,000 (Total for both prop 515,000)
Maximum NFIP - 1,000,000

If I understand correctly, we would need flood coverage for the loan balance of $386,000. We cannot consider that the loan balance includes money that was lended for the additional two properties.

You must require a minimum of at least 386000.00 and you will need 2 policies (the 2 policies added together must total at least 386000.00). If the bank wants to they can require full insurable value of the buildings up to the maximum available under the NFIP (in this case 2 policies totaling 515000.00).

Asking a similar question--

Commercial loan, 3 buildings all in a flood zone.

Balance on the loan is $350,000.
Building 1 RCV is $1,000,000.
Buildings 2 and 3 are under $100k RCV each.
Building 1 is insured to the max of $500k so that alone is greater than the balance of the loan.

I know 2 and 3 need some insurance...but I'm getting the feeling that a crafty loan officer won't agree. So how much do we require for those buildings? Both are currently insured for less than their RCV, so at least the insurance is there. But the question will come eventually from the LO. Is it correct that we can require however little the LO wants?

See the 2009 Flood Q&A - Question #14

We use a similar percentage method (see post from Many Hats) when we have a loan with multiple structures on a loan with multiple structures in a SFHA.