Expert ideation to solve policy challenges
Digital Dialogue No. 2:
Improving Flood Risk Disclosure
For markets to work efficiently, participants need full information. Without it, prices will be distorted and participants could make suboptimal decisions. This may be the current state of the United States housing market with respect to flood risk.
It is federal law that federally backed or regulated lenders require flood insurance on property loans in “Special Flood Hazard Areas.” This term refers to the 100-year floodplain, as mapped by the Federal Emergency Management Agency (FEMA). Lenders are required to disclose to borrowers when properties are located in this area. Some states also mandate that sellers disclose this information earlier in the home sale process. Multiple previous studies have documented a price discount for homes in Special Flood Hazard Areas.
This information, though, is insufficient. It falsely suggests that flood risk is binary, it fails to discuss potential damages, it does not communicate changing risk across the landscape, it does not provide the information early enough in the home buying process, and it does not do so freely on the platforms that people are using to explore potential homes and neighborhoods.
This digital dialogue addresses the following question:
How can flood risk disclosure be improved?
Director of the Center for Texas Beaches and Shores, Texas A&M University
Effective, ongoing communication of flood or storm risk to residents is an essential component of any initiative aimed at reducing losses over the long term. A particularly important time to communicate risk is during real-estate transactions. Disclosing hazard information to potential buyers can reduce the chance that someone is caught by surprise when their home is flooded or damaged.
Most prospective buyers do not take the time to investigate whether a property is subject to flooding, and may not be aware of information that could help them make informed decisions. Federal regulations enacted pursuant to the Flood Disaster Protection Act of 1973 (as amended by the National Flood Insurance Reform Act of 1994) require only that a lender advise a buyer of flood hazards before closing on the loan. This point of communication may come well after the buyer has put down earnest money or otherwise committed to purchasing the property. Only rarely do states or localities require more detailed disclosure of hazards during the property transaction process. Under its Natural Hazards Disclosure Act, California provides one such example where real estate sellers or brokers must disclose whether a property being sold lies within one or more state or locally mapped hazard areas, including FEMA 100-year floodplains and dam inundation areas. These hazards must be revealed on a form called the Natural Hazard Disclosure Statement that must be signed by both parties before closing. The law is meant to ensure that real estate buyers are aware of risks and are protected in cases where hazards are not properly disclosed.
A home is usually the largest investment any individual or family makes. Research shows, however, that homeowners generally are unaware of potential flood risks to properties before buying. Despite the ubiquity of basic risk data and the technological capabilities to deliver this information over the Internet, few jurisdictions are willing to provide a hazard disclosure service. In response to this lack of information, Texas A&M University developed a system called Buyers Be-Where, which shows prospective home buyers and sellers risks across 10 different hazards. Users can simply enter a street address or click on a parcel and receive a graphic and statistical risk assessment for a selected property. Comprehensive, easy-to-understand information of this kind offers a critical resource for anyone interested in making sound investment decisions. However, Buyers Be-Where is just one example of how risk information at the parcel level can be communicated to the public during critical moments of decision making. More work must be done if we want to fundamentally change behavior and not simply rely on regulations to force change. This means capitalizing on existing data streams and articulating risk through interactive web-based tools that will resonate with everyone interested in choosing safe places to live.
Water and Climate Attorney, Natural Resource Defense Council
A home that has flooded once is likely to be inundated again. Unfortunately, current and prospective homeowners often have minimal access to information about their flood risk. In 21 states, there are no statutory or regulatory requirements that a seller disclose a property’s flood vulnerability to a buyer. The other 29 states have varying degrees of disclosure requirements, creating a hodgepodge of state and local policies.
This information gap, coupled with insufficient access to flood risk information from the National Flood Insurance Program (NFIP), distorts market signals and hinders fully informed decision-making about how to avoid or mitigate damaging floods.
Reform of the NFIP could help to alleviate this problem by requiring the following:
- Nationwide real estate disclosure requirements of flood risk information. As a condition of participation in the NFIP, states should be required to enact real estate disclosure laws that provide the following information about flood risk:
- Whether the home has ever been damaged by a flood and the cost of the damage;
- Whether the home is located in a 100-year or 500-year floodplain;
- Whether the seller and/or previous owners ever received federal disaster aid that would require all future owners to obtain and maintain flood insurance on the property.
- A homeowner right-to-know provision. Upon request, FEMA should be required to provide current homeowners a “right to know” about their property’s past history of flood insurance coverage, damage claims paid, and whether there is a legal requirement to purchase flood insurance because of past owners’ receipt of federal disaster aid.
- A public right-to-know provision. FEMA should be required to create a centralized, free, open-to-the-public data system to share information related to flood damage claims, number of repeatedly flooded properties, and whether communities are properly enforcing local building and zoning codes required under the NFIP.
- A Carfax-type reporting system for flooded homes. As a part of any private flood legislation, Congress should require private insurers that sell coverage meant to satisfy the NFIP’s mandatory purchase requirement to report loss and claims information to an information exchange system similar to “Carfax” that would be publicly accessible.
DANIEL HENSTRA and JASON THISTLETHWAITE
Centre for International Governance Innovation
Mandatory disclosure of flood risk as part of property transactions is a potentially effective tool for flood risk management. Informing buyers about the risk to a property empowers them to decide whether they will take actions to manage this risk, or choose to live in another area. In practice, however, disclosure faces challenges, including conflicts of interest, poor data quality and accessibility, and misalignment with existing policy frameworks. The following are recommendations to address these challenges.
- An independent third party should manage flood risk disclosure. Most flood disclosure regimes rely on the property owner or a real estate representative to state whether a property has experienced any damage from flooding or is located in a flood hazard area. This can lead to a conflict of interest as both parties have incentives to limit or conceal information that they perceive might jeopardize the sale or reduce the selling price of the property.
- To ensure credibility, the data foundation for disclosure should be publicly accessible flood risk maps that are current and standardized across jurisdictions. Flood risk information must be updated regularly to account for changing hydrology, land-use and climate, all of which could affect the exposure and vulnerability of a property.
- Disclosure must be user-friendly to ensure both sellers and buyers can access and fully understand the information. Flood risk maps linked to disclosure should be searchable (e.g. zip code), depict previous floods that have affected properties, include information on all types of flooding (e.g. coastal, riverine and pluvial), and provide advice on property-level protection and insurance.
- Political support for flood risk disclosure will be weak if liability falls on property owners who unknowingly purchased property in a high risk flood area, so it must be aligned with other policies that enable property owners to reduce their risk. Buyouts at market prices and subsidies for property-level flood protection are two such policies that could improve the public legitimacy of disclosure regimes.
For more discussion, see our policy brief “Buyer Beware: Evaluating Property Disclosure as a Tool to Support Flood Risk Management.”
While advocating for State-run buyouts for my Foxbeach community in Staten Island after Hurricane Sandy, I found that one of the common complaints from residents was that they did not know that their homes were in a floodplain. Many lamented that they only found out at their closing, when it was matter-of-factly explained that the extra $30 or $40 that was added to their monthly mortgage payment was for flood insurance. The payment may have been explained, but the danger was most certainly not. As a Realtor, I found this to be very disturbing. Now today, just six years after the storm, real estate listings in the storm damaged area (even those just outside of the buyout areas) rarely mention that flood insurance is required or that the home sits in the floodplain. Many of the homes were renovated by using flood insurance proceeds or purchased and renovated by investors, and currently sit just as vulnerable as they were before Sandy – but now with new occupants.
As an active member of the Staten Island Board of Realtors, I formed a committee in early 2018 to create a floodplain disclosure document. I worked with the New York City Mayor’s Office of Resiliency and Recovery for their input. Although New York state has a real estate disclosure law that includes requirements for sellers to disclose information regarding flooding, there is an exception that allows sellers to pay $500 to the buyer so they do not have to fill it out. As such, we came up with a proposed document that all sellers in the state would have to complete. It is modeled after a statewide disclosure document for lead paint. Unfortunately, as of this writing, the document has not been endorsed by any lawmakers or the State Association of Realtors.
Senior Policy Representative, National Association of REALTORS®
National Association of REALTORS® (NAR) members agree that property owners and buyers should have access to more timely and accurate flood risk information in order to make fully informed decisions.
However, a national real estate disclosure requirement is not the answer. Property sellers are already generally required to disclose any adverse material property conditions of which they have actual knowledge, including flooding. This is true in most states, including those without a disclosure requirement in state statute or regulation (e.g., Florida). Yet, properties continue to be transferred without buyers having a complete understanding of the risk because of the gray areas that are inherent to all disclosure requirements.
In order to improve the disclosure of flood risk, additional communications tools are required. Here are three worth exploring:
- Property specific flood mapping. Currently FEMA maps the risk by broad geographic areas, not individual properties. However, if more granular flood cost/risk information were available for each property like North Carolina’s Flood Risk Information System, consumers would be in a far better position to make informed risk decisions.
- Clear communication to buyers. Currently, only the current owners may obtain the full claims history of a property from the National Flood Insurance Program under FEMA’s interpretation of the Privacy Act (see here). However, buyers should also have access to the claims history of any property they are about to buy before being obligated under a contract. Clarifying the Privacy Act, especially for repeatedly flooding properties, would give buyers direct access to that information while avoiding the limitations of disclosure laws.
- “Home Flood Facts.” Another potential tool would be to create a Carfax-like website but for NFIP claims on real property. This idea will have to be fleshed out and discussed but an online database should have the same advantages of option 2, except buyers would not have to wait weeks for FEMA to communicate the claims history during real estate transactions that are extremely time-sensitive.
NAR members appreciate the opportunity to contribute and look forward to fleshing out and discussing these proposals further.
Policy Director, Climate and Energy Program, Union of Concerned Scientists
Many homeowners are currently unaware of the true risks of flooding to their properties because of a combination of a lack of information and misinformation. Outdated and inaccurate flood risk maps and short-sighted government policies and market incentives often mask risks. Public and private investments prop up business-as-usual choices that fail to account for factors such as sea level rise and extreme precipitation.
Knowledge of these risks is necessary for better decision-making. Crucially, actions to disclose and communicate flood risks must be supplemented with resources and options for adaptation measures because greater awareness of flood risks will also bring challenges, especially to communities whose risks are revealed to be high.
The federal government can and must play a lead role in communicating flood risks to the public and encouraging more resilient choices. Localized risk information should be reflected in its scientific reports, policies and actions. FEMA flood risk maps—which help set flood insurance rates, guide local land-use policies, and inform infrastructure design standards—must be updated to reflect sea level rise projections and growing inland flood risks. Rates for the National Flood Insurance Program (NFIP) should reflect risks. Post-disaster aid must come with standards requiring flood-resilient rebuilding. State and local policymakers must help disseminate flood risk information to communities and set local zoning and building regulations in line with these risks.
National standards for flood-risk disclosure for all real estate transactions would go a long way toward making risks clear and transparent in real estate markets. Mortgage underwriters and home appraisers can also play important roles in assessing and disclosing information about these risks to lenders and buyers. Widespread adoption of industry standards and best practices for disclosing flood and other climate-related risks is needed. Credit rating bodies also must start reflecting risks to coastal property, while rewarding proactive adaptation measures to limit those risks.
As a nation, we have a narrowing window of opportunity to address worsening flood risks in a holistic way to better protect communities. Many smaller communities and low- and moderate-income homeowners could be left financially stranded, through no fault of their own, if their property values fall as the market begins to factor in flood risks. Frontline communities will also need increased funding for flood mitigation measures at the homeowner and community-wide level, as well as for voluntary home buyouts and relocation in the highest risk areas.
For more information, please see a 2018 report from the Union of Concerned Scientists, Underwater: Rising Seas, Chronic Floods, and the Implications for US Coastal Real Estate.
Director, Loan Administration, Mortgages Bankers Association
Floods are the number one natural disaster in the United States in terms of lives lost and property damaged and yet a substantial number or homeowners, particularly those with homes outside of the Special Flood Hazard Area (SFHA), underestimate their risk, sometimes with devastating consequences. An important first step in improving flood risk understanding is to change the conversation from whether or not a borrower must purchase flood insurance to why they should.
Under our current system, the primary purpose of flood risk disclosure is to notify borrowers with properties located within a SFHA that flood insurance is required as a condition of the loan. Little, if any, information about flood risk is provided to borrowers whose properties fall outside a high-risk zone. Requiring flood insurance on one side of a line but not the other creates the impression that flood risk is entirely contained within clearly defined geographical boundaries. We see this sentiment reflected when borrowers who were previously subject to mandatory flood insurance coverage cancel their policy after a map change.
One opportunity to improve flood risk disclosure is by providing more information to borrowers when a property is mapped out of a SHFA. While not required to, many lenders send a notice of map change to impacted borrowers informing them that flood insurance is no longer required. A coalition of industry stakeholders has been working with FEMA to develop a model notice to explain that flood risk is reduced but not eliminated and highlight the benefit of keeping flood insurance coverage. This will fill a gap in our current flood disclosure process and help raise awareness of understanding of flood risk.
Compliance Principal, CoreLogic Flood Services
An effective flood risk disclosure communicates about the likelihood, severity, and potential impact of flooding at a property or structure. Notably, within each of these criteria exists uncertainty and the possibility for changing circumstances. How much rainfall will occur? Will new development impact drainage? Will mitigation efforts reduce stream overflow? What will be the effect of the new sea wall? How will future climate conditions differ?
Uncertainty and the potential for change does not render such communication ineffective or futile. Rather, it means that policymakers should consider both consumers’ demands for more information and private industries’ ability to innovate to meet that demand and to support new policies. Policymakers at federal, state, and local levels should look beyond the existing federal flood insurance requirements imposed on banks, credit unions, and mortgage companies when considering ways to improve a consumer’s comprehension of flood risk. The flood insurance requirements on mortgage loans continue to be critical to ensure homes and businesses in high risk areas have flood insurance; however, these requirements do not and are not intended to help consumers understand the likelihood, severity, and potential impact of flooding.
Consumers require more information and the private industry can provide it. When considering policy changes around flood risk disclosures:
- Flood risk scores derived from FEMA’s flood insurance studies and privately developed flash flood, riverine, and storm surge models could be used within required disclosures to more effectively communicate risk.
- FEMA flood maps should include a boundary zone around the edge of the mapped Special Flood Hazard Area (SFHA) to help consumers understand uncertainty around flood events.
- Real estate disclosures should include the flooding history within a community, a neighborhood, and for a property, using information made available by the NFIP and the community.
Technology and data exist to differentiate more granular risk levels within the SFHA as well as outside of the SFHA which insurance agents could use to generate risk disclosures for their customers.