Flood Insurance Lapse Advisory

As you may know, the National Flood Insurance Program expired on March 28, 2010 and will not be extended until, at the earliest, April 12, 2010 when Congress reconvenes after its current recess. Obviously, the ability to close transactions on properties located in flood zones may be significantly impacted during this gap period. Lenders will still be required to determine if properties are located in a flood zone and in cases where a property is located in a flood zone, it is unclear whether lenders will allow such transactions to close and if so, under what conditions.

Flood Insurance Policies cannot be issued or renewed during this gap period but flood insurance companies reportedly can complete applications and accept payments pending the reinstatement of the Program. Lenders may be willing to close transactions with evidence of such applications being filed based upon the expectation that Congress will promptly reinstate the Program and make the reinstatement effective retroactively to March 28,2010. However, whether or not that is going to be acceptable is presumably, entirely in the discretion of the applicable lender involved in the transaction. Another possible option to explore is whether it may be possible for the seller to transfer the seller’s existing flood insurance policy to the buyer. In any case where a property is known or believed to be in a flood hazard zone and the transaction is scheduled to close during this gap period, the buyer should be advised to contact his/her lender as soon as possible to determine what the lender’s position/requirements will be relating to flood insurance.