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Flooding that hurts lenders

Richard Sexton 2012

Anyone attempting a journey across country recently will have seen some truly remarkable vistas following the most recent widespread flooding, estimated by analysts as causing circa £1bn of damage. 

It does feel like this is now set to become an at least annual event in some parts of the country.

Maybe we should have turned the heating down a bit all those years ago, after all.

Once again this has brought the issue of properties becoming uninsurable and hence mortgageable into the public domain.

It looked like the Government and Insurers would reach a deal to ensure all properties remained protected in return for significant investment in flood defences but it now seems they are struggling to reach an agreement. Lenders are having to consider seriously how they might deal with this issue themselves. 

For new originations, it is perhaps not so much of an issue – plenty of data sets exist that can be used to identify at risk property – but equally no lender will want to ‘redline’ particular areas if they can help it, so how to use this information? 

The bigger issue is around the lenders’ back books. 

A worst-case scenario for a lender is an uninsured property becoming damaged in a flood – the homeowner can’t pay as there is no insurance.

And then following repossession, the lender is left with an asset with cash value only.  A wash out indeed, save for the local rental market, where competition from long term accommodation grows overnight.

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