First your home is flooded — then you lose your mortgage?
When flooding ravaged parts of southern Alberta in 2013, banks and other lenders took notice.
“We would be asked on every deal, ‘Is it in the flood zone?'” Mike Boyle, president of Calgary-based The Mortgage Group, told Global News.
Lenders didn’t want to get involved with addresses that turned out to be in the disaster areas, he recalled.
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Six years later, with the flood a “distant memory,” that’s no longer an issue, according to Boyle. But he worries about homeowners in regions like southeastern Ontario and Quebec, where rivers seem to be overflowing with alarming regularity.
“You can’t get a mortgage if you can’t get insurance,” he said.
READ MORE: How to protect your home from flooding
Speaking from the Ottawa-Gatineau area, which is experiencing its second major flood in the span of 24 months, licensed insolvency trustee John Haralovich shares the same concern.
“We have seen lenders not agree to renew the mortgage,” said Haralovich, a senior vice-president at debt consultancy firm MNP.
Those have been rare cases so far, he said, but that could change.
“In 2017, they said (the flood) was a once-in-100-year occurrence, and two years later, it’s happened again,” he said.
Homeowners who discover they can’t continue their insurance coverage may also hear from banks that they won’t keep servicing their mortgage once it comes up for renewal, he added. With no insurance to protect the collateral, mortgages on homes in flood-prone areas may become too risky for mainstream lenders, he said.
Several experts who spoke to Global News are concerned that a growing number of Canadians may find themselves facing this issue after the latest round of spring flooding.
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The trouble with overland flood insurance
Some 1.7 million Canadian households, or roughly 20 per cent of the population, are exposed to the risk of so-called overland flooding, in which the water flows in from windows, doors and cracks in the walls, usually from an overflowing river or lake.
The good news for them is that overland flood insurance, which didn’t exist for residential dwellings during the 2013 Alberta floods, is now increasingly available in Canada.
The bad news is that no kind of private insurance is meant to cover homeowners from natural disasters that keep happening.
Between eight and 10 per cent of Canadian homeowners live in areas where the likelihood of recurrent flooding is so high that insurance coverage is not available or would come at an “outrageous” cost, Robert Harrison, chairman of the Insurance Brokers Association of Canada, told Canadian Underwriter.
But even homeowners who have been able to buy overland flood coverage can’t necessarily rest easy. If they ever make a claim on that coverage, it is “entirely possible” that they will see their coverage reduced or their insurance costs increased at renewal, said Anne Marie Thomas of InsuranceHotline.com. And if there is a high enough risk that they will be flooded again, they may not be able to continue their coverage at all, she added.
Insurance is meant for events that are “sudden and accidental,” said Pete Karageorgos of the Insurance Bureau of Canada.
“You don’t necessarily meet that threshold … if you’re living in a floodplain and odds are it may flood again,” he said.
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Canadians who have another type of flood coverage called sewer backup insurance also face a similar conundrum. Filing a claim because backed-up city pipes caused water to flow back into your basement may cause your insurance provider to rethink the terms of your policy when its term is up.
But homeowners dealing with a flooded basement can take several steps to help limit the risk and extent of future water damage and keep their insurance company happy, Thomas said. That includes measures such as installing a sump pump, which helps pump out water accumulating under your home, or a backwater valve, which prevents water in sewage pipes from backing into your house.
Those measures, though, only go so far when you have water breaking in through your windows and doors from nearby rivers and lakes, Thomas said.
“You can’t stop Mother Nature,” she said.
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Floods, mortgages and bankruptcies
Eventually, floods can lead to debt defaults, Haralovich said.
Lenders’ refusal to renew mortgages, of course, is one potential trigger. If homeowners are asked to pay off their outstanding mortgage balance and can’t cover those costs by selling their property, they may have no choice but to default.
Another plausible scenario is that they would be able to turn to alternative lenders, which take on riskier loans but also charge higher interest. That may be a temporary solution, but over time, higher mortgage costs could still push homeowners into debt restructuring, Haralovich said.
A third possible driver is repair bills.
Haralovich recalled seeing one family after the 2017 flood who was forced to file a consumer proposal, despite having some flood insurance.
The policy didn’t cover all the costs so the family used credit cards to finance the rest of the repairs. Within a few months, according to Haralovich, the bills and credit charges had spiralled out of control.
“There is an emerging risk facing Canada’s mortgage market, where flood-related mortgage arrears may become more frequent following flood events as saving rates remain low and more households are subject to repeated flooding,” reads a report by Natalia Moudrak and Blair Feltmate of the Intact Centre on Climate Adaptation at the University of Waterloo.
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That risk exists for sewer backup flooding, too. The average cost of a flooded basement is $43,000, while available insurance coverage is sometimes capped at less than half that in certain areas, Feltmate previously told Global News.
Meanwhile, surveys show almost half of working Canadians live paycheque to paycheque, the Intact study noted.
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Where is the government?
For years, the expansion of the private flood insurance market after the Alberta floods coincided with an attempt by various levels of government to curtail their own responsibility toward property owners, according to Jason Thistlethwaite, a professor at the School of Environment, Enterprise and Development at the University of Waterloo.
In 2016, for example, British Columbia announced that applicants for disaster financial assistance who could “reasonably and readily” have purchased overland flood insurance would not be eligible to receive the government aid.
The idea was that promoting insurance coverage would help contain the flood-related costs borne by taxpayers. But private insurance alone is ill-suited to protect property owners in areas with a high risk of repeated flooding, Thistlethwaite noted.
“This lack of insurance availability in high-risk areas is likely to undermine the federal government’s goal of reducing the costs of publicly funded disaster assistance,” he predicted in a paper co-authored with Daniel Henstra for the Centre for International Governance Innovation.
That realization seems to have dawned on the government now.
Prime Minister Justin Trudeau said last month that residents in some areas will have to “move or rebuild differently,” while Quebec Premier François Legault has spoken about paying $200,000 for homeowners in the Ottawa River floodplain to move away from the area.
Buyouts have also been a topic of discussion in formal talks between Ottawa and provincial governments. Efforts are also underway to draw or update flood-risk maps. And policy-makers are speaking with insurers about creating a flood-risk insurance pool to fund coverage in flood-prone areas. Insurance companies would set aside part of the revenues to offer subsidized coverage in these areas in a model similar to what is used in Canada to offer auto-insurance coverage to high-risk drivers, Thistlethwaite said.
It makes for a stark contrast to the narrative politicians were using in the aftermath of the Alberta floods, in which the emphasis was on restoring things to the way they were before, Thistlethwaite said.
Now, he added, the language has changed.
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“It’s quite clear in some areas that we can’t simply let people rebuild — we need to start thinking about this as much more of a systematic national crisis.”
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