Climate Change’s Impact on Mortgage Lending & Flood Zone Determination


Climate Change’s Impact on Mortgage Lending & Flood Zone Determination

March 18, 2024
Certified Credit

From hurricanes to forest fires, the environmental impacts of climate change are becoming more pressing with each passing year. Flooding, in particular, is an especially pertinent issue, as 90% of natural disasters involve some degree of flooding.[i]

In the last decade, flood damage has cost Americans over $50 billion.[ii] According to FEMA, just one inch of water damage can result in $25,000 of property damage.[iii] Floods can decimate neighborhoods, devastating the homeowners and mortgage lenders of those affected properties.

So, what do climate change’s growing risks mean for lenders? Below, we’ll examine how floods and other types of natural disasters may impact mortgage lending going forward.

Who Bears the Increasing Flood Risk From Climate Change?

Climate change has far-reaching implications for the real estate and financial industries as a whole. Currently, flood risk is shared by the following stakeholders:

    • Homeowners – Naturally, the people who own homes in high-risk flood zones bear a lot of the risk. They stand to lose their homes, belongings, and a lot of money if they’re uninsured or underinsured.
    • Landlords – Likewise, property owners who rent out their real estate face financial threats from floods and other natural disasters.
    • Mortgage lenders – Lenders that originate loans for homes in flood hazard areas may experience higher rates of loan delinquency and foreclosure. They may also be unable to offload as many loans to government-sponsored entities (GSEs) and other investors.
    • Secondary market investors – Speaking of the secondary loan market, investors who hold loans with high flood risks stand to lose money if these loans go into default. Due to the uncertainty of climate change, many risk-averse investors may start withdrawing their funds, limiting lenders’ liquidity.
    • Flood insurers – As flood claims increase in response to climate change, the financial burden on these insurance providers will rise as well. Currently, the government provides the majority of flood insurance.[iv]

As a mortgage lender, managing your flood risk is of utmost importance, especially as instances of flooding increase in response to climate change.

The Lack of Preparedness Amongst Stakeholders

Unfortunately, very few stakeholders are sufficiently prepared for the influx of natural disasters that are most likely going to arise in the coming years. Many mortgage professionals simply don’t understand how to gauge these risks or know what to do about them.[v]

Here are a few changes the housing market can expect to see as climate change escalates:

    • Increasing stress on FEMA’s National Flood Insurance Program (NFIP)
    • More instances of mortgage default and premature payoffs
    • Rising housing price volatility
    • Climate migration patterns in home purchases
    • Stricter loan regulations laid out by GSEs

With these fluctuations in mind, lenders must examine their loan portfolios through the eyes of GSEs. In the coming years, GSEs may require lenders to enhance their flood insurance due diligence. Mortgage lenders can proactively prepare for these changes by tightening up their flood risk mitigation efforts now.

FEMA’s Recent Flood Insurance Updates

FEMA’s 2024 Federal Disaster Assistance Announcements

Over the past few years, several American cities have experienced extreme weather. San Diego’s severe flooding and Spokane’s devastating wildfires are two noteworthy examples. In response to these destructive events, FEMA has extended federal disaster assistance to affected areas, including:

  • Grants for temporary housing and home repairs
  • Low-interest loans for uninsured property losses
  • Other programs to assist individuals and businesses
  • Federal funding to strengthen statewide hazard mitigation measures

Individuals and business owners affected by these events can apply for assistance by:

Let’s take a look at some state-specific details about these natural disasters and their FEMA assistance programs:


From January 21st to January 23rd, 2024, several San Diego cities were hit by an intense rainstorm that caused extreme flooding. In the storm’s wake, thousands of residents lost power, while hundreds required rescue from firefighters, including a few people who had to climb on top of their roofs to stay above water. 

Naturally, these floods caused extensive damage to local homes and businesses. Since 20% to 25% of the country’s mortgages are for California properties, these floods also caught the attention of many mortgage lenders. 

Fortunately, on February 19th, 2024, FEMA announced that it extended its federal disaster assistance to affected San Diego County residents and business owners. This assistance includes the four types of aid outlined above. The Federal Coordinating Officer for this aid is N. Allison Pfaendler. If additional assistance is deemed necessary, it may be granted at a later date. 


During the hot, dry summer months, Washington often faces widespread wildfires. According to the Commissioner of Public Lands, Hilary Franz, 2023 was one of the state’s “most challenging fire seasons yet.” Spokane County, in particular, suffered catastrophic wildfires, which burned more homes than any other fire in the state’s history. These fires took place from August 18th to August 25th, 2023. They decimated 369 homes, damaged 447 others, and killed two people. In light of climate change, many experts believe that wildfires like this will only become increasingly common across western Washington as time goes on. 

On February 20th, 2024, FEMA extended federal disaster assistance to support Washington residents and business owners affected by the August wildfires. Federal funding has also been made available to state, tribal, and eligible local governments, as well as private non-profit organizations, to facilitate emergency work and debris removal in Spokane County. Lance E. Davis is the Federal Coordinating Officer for this aid. As with California, further support may be provided later on if needed. 

Past FEMA Updates

FEMA is getting a head start on adjusting to climate change by overhauling its NFIP.[vi] This revamp, called Risk Rating 2.0, was unveiled in April 2022. It began affecting existing flood insurance policies on April 1st. New flood insurance policies will start including its changes on October 1st, 2022.[vii]As soon as Risk Rating 2.0 takes full effect, it’s estimated that 77% of policyholders will see a gradual increase in their insurance premiums. Fortunately, these price increases are restricted to 18% per year until they reach their final rate. For many properties, this price increase process may take up to 10 to 15 years.[viii]

Here are some of the major changes included in Risk Rating 2.0:

    • Insurance will be priced according to properties’ unique risk – Historically, lower-risk homes and higher-risk homes paid the same amount for federal flood insurance. For example, the owner of a multi-million dollar home on Louisiana’s coast paid the same as a $300,000 homeowner in Wyoming.
      Lower-risk homes will no longer subsidize higher-risk homes under Risk Rating 2.0. Regulators acknowledge that this practice is simply not equitable or fair. As a result, many homeowners may see an increase or decrease in their flood insurance costs.
      Here are some projections provided by FEMA regarding the first year of Risk Rating 2.0’s rollout:[ix]

        • 66% of policyholders will see their premiums go up by $10 per month
        • 7% of policyholders will see their premiums go up by $10 to $20 per month
        • 4% of policyholders will see their premiums go up by $20 or more per month
    • Insurance will take into account more details – Federal flood insurance has historically only considered a property’s elevation and annual risk of flooding. Going forward, it will also consider its replacement cost and specific flooding risk (ie. rainfall, river flooding, coastal flooding), as well as its proximity to the potential source of flooding.
    • Insurance will consider climate change modeling — Finally, FEMA will start taking into account climate change models that predict sea level fluctuations, droughts, and wildfires.

The purpose of these changes is to ensure that FEMA can sustain itself financially as the stressors of climate change continue to mount. It will also prevent policyholders with lower-priced homes from paying more than they should.[x]
Unfortunately, homes that experience a notable spike in their flood insurance costs may not be as desirable going forward. Thus, it’s important for future-focused mortgage lenders to take into account the home valuation implications of Risk Rating 2.0.

Common Flood Risk Myths

Grasping the effects of climate change on the mortgage market can be challenging, even for professionals in the field. It’s not surprising that many homeowners don’t fully understand the evolving situation.

As a mortgage lender, you can educate borrowers on the impact of flooding and flood risk prevention.

Here are some common myths you may want to debunk for your customers:

    • “I don’t need flood insurance, since my neighborhood isn’t prone to flooding” – Floods can occur for many different reasons. You don’t necessarily need to live on the coast, near a river or dam, or in a rainy climate to be at risk.
      In fact, 25% of claims to the National Flood Insurance Programs (NFIP) aren’t from high-risk areas.[xi] Freak events, such as landslides to blocked drainage systems, can lead to unexpected flooding and costly damage.
      One stark example is Hurricane Harvey in Houston. This catastrophic hurricane damaged over 200,000 homes. 80% of these homes didn’t have flood insurance,[xii] since they weren’t located in flood hazard areas at the time. Unsurprisingly, these damaged homes’ mortgage delinquency rates spiked by 200%.[xiii]
    • “Since I’m not in a flood zone, I’m not eligible for flood insurance.” – Another common misconception amongst homeowners is that you can’t purchase flood insurance if you’re not in a flood hazard area.
      Most American neighborhoods fall into the scope of the National Flood Insurance Program (NFIP). People who live in these neighborhoods can purchase federal flood insurance.
      If you aren’t located in one of these communities, you can still protect yourself with private flood insurance. Considering the financial devastation that floods can cause, having some degree of protection can provide immense peace of mind and essential financial insulation.
    • “If the last homeowner didn’t have flood insurance, I probably don’t need it” – FEMA is required to update its flood maps every five years according to new data, enhanced topography, and changes in hydrology.[xiv] Past flood determinations at the time a previous homeowner purchased a property aren’t necessarily accurate anymore, especially in light of climate change. In turn, new homeowners should assess their properties’ current risk with the help of a flood insurance professional.
    • “My homeowner’s insurance policy will cover flooding” – Unfortunately, flooding is rarely covered in standard home insurance and renters insurance policies.[xv]
    • “Only homeowners can purchase flood insurance policies” – Residential homes aren’t the only types of properties that can be protected by flood insurance. Condos, apartments, commercial buildings, and other non-residential buildings are eligible for coverage too.
      Here’s the maximum amount of coverage you can receive from flood insurance for the following types of properties:[xvi]

        • Single-family residential buildings – $250,000
        • Multi-family residential buildings (per unit) – $250,000
        • Commercial structures – $500,000

In addition to providing protection for the property’s structure, flood insurance can cover the cost of damaged belongings within the building. Contents coverage is available for up to $100,000 for residential homes and up to $500,000 for commercial buildings. Renters who want to protect their belongings from flood damage are eligible for these types of policies as well.

By bringing awareness to these inaccurate assumptions, you can protect your borrowers and business from undue flood risk.

The Issue of Inadequate Disclosure Laws

Flood risk disclosure laws are another area that may need to be revamped in the coming years. Currently, disclosure laws during real estate transactions vary from state to state. Only 35 states currently have flood disclosure laws on the books.[xvii] In many of these states, the flood disclosure laws are insufficient.

Regardless of state laws, FEMA currently recommends that sellers tell potential buyers:

    • If their property is located in a flood hazard area
    • If their property requires or currently has federal flood insurance coverage
    • The cost of flood insurance premiums for the property
    • If the property has ever been flooded in the past
    • The amount of times the property has been flooded
    • The severity of damage done to the property
    • If the property has qualified for disaster-related aid

States that require these types of disclosures enjoy higher rates of residential flood insurance coverage.[xviii] Without detailed disclosures, homebuyers and lenders may struggle to make informed decisions.

What’s more, deficient disclosure laws may leave real estate investment trusts (REITs) more vulnerable to unreported flooding risks. That’s just one more example of how localized climate threats can have far-reaching economic consequences.

Certified Credit: Take on Climate Change With Confidence

As you can see, climate change is a growing concern for various stakeholders within the mortgage industry. FEMA is paving the way toward risk-integrated change with its recent updates. Savvy mortgage lenders should follow suit.

While credit will always be one of lenders’ top criteria for granting mortgages, flood risk should also be considered during lending calculations. Here at Certified Credit, we make this process easy with our Flood Zone Determination. This tool enables you to quickly, accurately, and affordably determine if a property is located within a flood zone. Some of its other features include:

    • Free flood zone determinations at the time of application
    • Up-to-date flood certificates (used by FEMA, FHLMC, and major investors)
    • Flood zone status monitoring for existing borrowers
    • Easy Home Mortgage Disclosure Act (HMDA) and CensusTract report ordering
    • Regulatory support to ensure you notify borrowers when FEMA issues relevant changes to their flood zone determinations

In addition to Flood Zone Determination, we also offer the following mortgage solutions:

    • Affordable credit reports
    • Credit score improvement tools
    • Automated lead generation tools
    • Automated prequalification
    • Automated verification of income and employment
    • Property and valuation tools
    • Fraud and risk support
    • Underwriting compliance support
    • Settlement services

Want to keep your head above water in this ever-evolving mortgage market? Schedule a credit consultation with our team today.



[i] Insurance Information Institute. Facts about flood insurance.

[ii] National Centers for Environmental Information. Disaster and Risk Mapping.

[iii] FEMA. Flood Risk Disclosure: Model State Requirements for Disclosing Flood Risk During Real Estate Transactions.

[iv] Insurance Information Institute. Facts about flood insurance.

[v] Research Institute for Housing America. The Impact of Climate Change on Housing and Housing Finance.

[vi] CNBC. FEMA overhauls the National Flood Insurance Program for climate change.

[vii] FEMA. National Flood Insurance Program: The Current Rating Structure and Risk Rating 2.0.

[viii] FEMA. Risk Rating 2.0 – National Rate Analysis.

[ix] FEMA. Risk Rating 2.0 – National Rate Analysis.

[x] Investopedia. FEMA Rolls Out New Flood Insurance Rate System: Will You Pay More?,to%20experience%20the%20largest%20increases

[xi] FEMA. Fact Sheet: Myths and Facts About Flood Insurance.

[xii] The Washington Post. Where Harvey is hitting hardest, 80 percent lack flood insurance.

[xiii] CNBC. Mortgage market is unprepared for climate risk, says industry report.

[xiv] FEMA. Notice to Congress: Monthly Update on Flood Mapping.

[xv] Insurance Information Institute. Which disasters are covered by homeowners insurance?

[xvi] FEMA. ​​Myths and Facts About Flood Insurance.

[xvii] FEMA. Flood Risk Disclosure: Model State Requirements for Disclosing Flood Risk During Real Estate Transactions.

[xviii] FEMA. Flood Risk Disclosure: Model State Requirements for Disclosing Flood Risk During Real Estate Transactions.