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F I S C A L I M P A C T R E P O R T

SPONSOR Sanchez, M.

DATE TYPED 02/19/05 HB

SHORT TITLE Study Lender Flood Insurance Requirements

SB SJM 23

ANALYST Kehoe

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

(See Fiscal Im-

pact Narrative)

NFI

NFI

NFI

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

New Mexico Mortgage Finance Authority (MFA)

SUMMARY

Synopsis of Bill

Senate Joint Memorial 23 requests the New Mexico Mortgage Finance Authority (MFA) to study

the limits of flood insurance required by lenders making real property loans.

Significant Issues

Senate Joint Memorial 23 states the flood insurance coverage required for residential properties

is the lesser of the maximum amount of National Flood Insurance Program coverage available

($250,000), the outstanding principal balance of the loan, or the value of the property minus the

land. It further states “there are lenders making loans to owners of real property in New Mexico

that require the purchase of flood insurance in the amount of $250,000 regardless of the out-

standing balance of a loan on such property—imposing an unnecessary financial hardship on

those real property owners.”

Senate Joint Memorial 23 requests MFA to study the necessity of requiring flood insurance cov-

erage in excess of the outstanding principle balance of a property loan and to propose legislation

to protect the financial interest of property owners who are required to pay flood insurance.

MFA indicates it would willingly support and participate in a study of this nature, but any legis-

lation proposing the enforcement of federal flood insurance coverage requirement guidelines

would more than likely involve the Financial Institutions Division of the Regulation and Licens-

Senate Joint Memorial 23 -- Page 2

ing Department and/or the Insurance Division of the Public Regulation Commission.

FISCAL IMPLICATIONS

MFA serves as the state’s designated affordable housing finance agency. The study required by

Senate Joint Memorial 23 will require staff and financial resources that would be otherwise util-

ized to provide affordable housing subsidies. MFA’s expertise in the area of flood insurance re-

quirements for single-family residential property is limited. MFA may have to contract the nec-

essary expertise to perform the study and to develop recommendations to the legislature.

TECHNICAL ISSUES

Regulatory agencies such as the Financial Institutions Division of the Regulation and Licensing

Department and/or the Insurance Division of the Public Regulation Commission may be better

suited to undertake the study proposed by Senate Joint Memorial 23.

OTHER SUBSTANTIVE ISSUES

MFA provides the following additional information relative to flood insurance: In 1968, Con-

gress created the National Flood Insurance Program (NFIP) in response to the rising cost of tax-

payer funded disaster relief for flood victims and the increasing amount of damage caused by

floods. The Mitigation Division of the Federal Emergency Management Agency (FEMA) man-

ages the NFIP, and oversees the floodplain management and mapping components of the Pro-

gram.

Nearly 20,000 communities across the country participate in the NFIP by adopting and enforcing

floodplain management ordinances to reduce future flood damage. In exchange, the NFIP makes

federally backed flood insurance available to homeowners, renters, and business owners in these

communities.

Flood damage is reduced by nearly $1 billion a year through partnerships with communities, the

insurance industry, and the lending industry. Further, buildings constructed in compliance with

NFIP building standards suffer approximately 80% less damage annually than those not built in

compliance. FEMA’s website indicates that every $3 paid in flood insurance claims saves $1 in

disaster assistance payments.

The NFIP is self-supporting for the average historical loss year, which means that operating ex-

penses and flood insurance claims are not paid for by the taxpayer, but through premiums col-

lected for flood insurance policies. To get secured financing to buy, build, or improve structures

in Special Flood Hazard Areas (SFHAs) borrowers are required to purchase flood insurance.

Lending institutions that are federally regulated or federally insured must determine if the struc-

ture is located in a SFHA and must provide written notice requiring flood insurance.

Flood insurance is available to any property owner located in a community participating in the

NFIP. All areas are susceptible to flooding, although to varying degrees. According to FEMA,

25% of all flood claims occur in low-to-moderate risk areas. Flooding can be caused by heavy

rains, melting snow, inadequate drainage systems, failed protective devices such as levees and

dams, and tropical storms and hurricanes.

LMK/yr