Facing facts on floods and financing

Home Sale Hindsight

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jan. 8, 2010

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: I bought a home five years ago and did not notice that my second mortgage had a balloon rider. (I grew up in the projects and had never owned a home.) Also, the house was not in a flood zone when I bought it, but now the second lender says I am in a flood zone. I looked on my appraisal and the Federal Emergency Management Agency (FEMA) map used in 2005 was dated 1998!

When I contacted the builder's office, I was told that it still has homes for sale in this subdivision and the banks have not informed the builder that we're in a flood zone. The county engineer said that at the time I bought my home, the flood zone was to the west of my house, but since FEMA has updated its map, the flood zone includes my house.

I would not have purchased this home if it was in a flood zone! The guy who did my financing had commented that the builder is a crook. Also, I heard that the person who arranged my financing has recommitted suicide.

A: Wow. You have a lot going on there. Let's start at the very beginning.

Our childhoods and the patterns we observe our parents exhibit when it comes to handling financial and real estate decisions matter -- they can and do impact how we approach these issues as a grown-up. To be blunt, though: that was then, and this is now.

When you become mature enough to buy a home, it is your responsibility to read what you sign -- whether or not the others involved are crooks, etc. I have made both great and terrible real estate decisions in my life, but I can't say I ever "didn't notice" what I was signing.

One time, I saw a case where a rider was never shown to the borrower and forged by a truly crooked mortgage professional. By contrast, about 100 times I've heard borrowers acknowledge signing the documents with absolutely no understanding of what they were signing.

No one else can be blamed for your inattention, friend -- but the upside is that by taking responsibility for this past incident, you empower yourself to approach signing important and financial documents differently in the future (i.e., by reading/understanding them first).

Moving on, let's talk flood maps -- the Federal Emergency Management Administration is in the process of updating and digitizing flood zone maps nationwide as we speak. The fact is, an area's likelihood of suffering from a flood simply doesn't change every year, so these maps are not updated on an annual or even regular basis. In fact, in many areas, the "current" maps are 20 years old. So a seven-year-old map is, counterintuitively, not in itself a cause for alarm.

Every home in the country is in a flood zone -- the issue is what risk or hazard level is associated with the flood zone in which your home is located. If your home is in a low- or medium-risk flood zone, you are recommended, but not required, to obtain flood insurance. If, however, your home is in a special flood hazard zone -- meaning that there is a 1 percent risk of a flood event occurring in any given year -- and your mortgage is federally insured, you are required to obtain flood insurance.

Even being in a special flood zone is not cause for you to freak out and start filling sandbags -- but look at it from your lender's perspective. A 1 percent chance of a flood event in a year translates into a 30 percent chance of a flood event over the lifetime of a 30-year loan -- that's much greater than the risk of fire, robbery, lawsuits and the other risks that your lender requires you to insure against. Because it's much cheaper to insure against floods than to repair flood damage, your lender will require you to obtain flood insurance.

Assuming that you mean to say that your area's special flood risk area has been revised to include your house, per your conversation with the city engineer, there's no one -- except your fellow Americans, perhaps -- to blame for the changes in your home's flood zone status. The changes in the maps are due to changes to the planet -- erosion and (some say) global warming have contributed to major changes in the statistical risk of flooding in many areas, which is partially why FEMA is now updating the maps.

The change in your home's flood zone status is perhaps one of the most concrete, immediate impacts of the mayhem our behavior has wreaked on the environment. Maybe we'd all be a little more aggressive about recycling, reducing our carbon footprint and eating locally sourced foods if we knew that our careless behavior could actually cost us $50 or $100 every month in required flood insurance.

So, while there's no one in particular to fault for the change to your home's flood status, the chances are, you would have bought it back then even if the flood map was as it currently is. If you didn't pay attention to the fact that you had a balloon payment on your second mortgage, would you have been stopped by the flood zoning issue? Very likely not.

If I had to pinpoint a problem with your situation, besides your not reading or understanding your mortgages, I'd say that devoting attention to the flood issue, the builder being a crook, some poor soul possibly killing himself -- these are all distractions that are keeping you from focusing on the very real issue of an impending balloon on your second loan.

Eliminate all that noise -- which is out of your control anyway -- and focus on resolving that issue, now. Refinance it if you can, or ask your lender to modify and "fix" it if possible, but deal with it before the balloon comes due and tune out the rest.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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