Homes that are not expected to be associated with high flood risk are becoming more so.

Properties in the United States are exposed to $375 billion to $1trillion aggregated uninsured flood losses, according to a recent report from Moody's. These homes could pose a credit risk from rising property insurance costs and falling property values. 

The risk isn't evenly distributed, with Florida, Louisiana, South Carolina and Texas having the largest potential uninsured losses. Less than 2% of counties account for 65% of the protection gap. However, inland, non-mandated, non-mandated zones are the blindspot. 

"Most homeowners in America are probably unaware of flood risk if they're outside the 100 year flood zone and aren't aware that they could get a preferred priced flood insurance policy for a relatively low cost," said Dr. Howard Botts, Cotality's Chief Scientist.

Lenders use the Federal Emergency Management Agency's Special Flood Hazard Area maps to decide whether a property needs mandatory flood insurance. However, these maps primarily targeted riverine flooding don't account well for storm surge, sea level rise and heavy rainfall. This means that a property can sit outside of a flood zone and still be high-risk. 

Many homes in high risk areas are insured by the federally funded National Flood Insurance Program. The organization was first introduced in 1978 to provide coverage when private providers left the market and was sufficient for the first 25 years of service. But the NFIP is in debt to the U.S. Treasury and payments have been made from taxes. 

A report from the Consumer Financial Protection Bureau found that the NIFP underestimated at-risk homes by 440,000. Given the volatility experts say that the mortgage market needs to treat home insurance costs like a 1-year ARM and find ways to mitigate risk from there.

There is also a wealth disparity between those living in NFIP-designated coastal flood zones, who have higher credit scores and larger down payments compared to those living inland. Servicing these loans becomes difficult after severe weather patterns, delinquencies tend to spike. After Hurricane Beryl in Hustom, the storm led to 10,000 delinquencies that month.

But warning buyers ahead of time of climate risk can hurt sales. Last year, Zillow removed climate risk scores after complaints from the California Regional Multiple Listing service about the accuracy of these models. Many houses showed a high probability of flooding when they hadn't for years. These risk models need to take into account both the risky weather conditions but also the built environment and the structure of the homes. 

In 2024, the Federal Housing Finance Administration launched an online tool to help investors and stakeholders learn more about the properties in their portfolios most vulnerable to severe weather. Insuring a home for floods despite not having to by law is one way to mitigate that risk. 

"If you're not insured and you're just outside that 100 year zone, you're essentially self-insuring or hoping FEMA comes in and gives you money, which I don't think we can take for granted any longer," said Botts.