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Structure with Limited Value – Flood Required?

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  • #5608
    MBT_Compliance1
    Participant

    We have a security interest in 2 Improvements on the same parcel of property. Improvement #1 is not in a flood zone. Improvement #2 IS in a flood zone. The value of Improvement #2 is expected to be minimal in relation to the total value of property as it is a barn.

    I have found the examples in paragraphs below from the FDIC Compliance Exam manual. If the appraisal comes in with no significant value given to the barn, will this allow us to avoid the insurance requirement? Or, will we have to have the barn surveyed as a separate parcel and release our lien on that particular parcel to avoid the insurance requirement?

    Other Special Situations
    • Multiple Structures—Multiple structures that secure a loan located in an SFHA generally must each be covered by flood insurance, even though the value of one structure may be sufficient to cover the loan amount. FEMA does permit borrowers to insure nonresidential buildings using one policy with a schedule separately listing each building. Loans secured by agricultural properties and improvements may be particularly assisted through this practice.

    Some borrowers have buildings with limited utility or value and, in many cases, the borrower would not replace them if lost in a flood. Is a lender required to mandate flood insurance for such buildings? Answer: Yes. Under the Regulation, lenders must require flood insurance on real estate improvements when those improvements are part of the property securing the loan and are located in an SFHA and in a participating community. The lender may consider “carving out” buildings from the security it takes on the loan. However, the lender should fully analyze the risks of this option. In particular, a lender should consider whether it would be able to market the property securing its loan in the event of foreclosure. Additionally, the lender should consider any local zoning issues or other issues that would affect its collateral.

    #5609
    rcooper
    Keymaster

    If the building is located in a flood zone, flood insurance is required.

    You could have the parcel of land excluded from the mortgage but if you had to foreclose how marketable would that land be with the parcel excluded if it sits in the middle of your collateral – this is something you need to consider. Not that I’m recommending this, but I’ve seen borrowers tear down outbuildings/barns that have minimal value in order to avoid paying for flood insurance.

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