The longer-term effects of hurricane Sandy will be largely dependent on the level of insurance coverage on the property and the financial health of the borrower, said Citigroup Global Markets analysts in a report today.

The Citi report, which updated the numbers from a previous report, found that approximately 48,500 loans with about $16.3 billion in unpaid principal balance are in flood-affected areas. The majority of the loans are in the subprime and Alt-A sectors.

Although the loans are covered by homeowner's insurance, it does not not cover flood-related damages. Citi analysts explained that the standard homeowner insurnace policy covers damage to the house (non-flood related), loss of personal property, and costs of temporary housing if the house becomes uninhabitable.

Borrowers with flood damage will face much higher costs. Citi analysts said that only properties in a FEMA-designated special flood hazard area (SFHA) are required to purchase flood insurance. Its likely that properties damaged that fell outside the SFHA, are entirely uninsured and the borrower is therefore responsible for all of the costs incurred.

Citi said that even with flood insurance coverage, borrowers may still face losses given that flood policies typically are more limited than homeowner’s insurance coverage. Flood insurance policies offer no reimbursement for temporary housing, no coverage for outside structures such as fences and patios, and only cash value coverage for personal property.

"Those borrowers affected by the flood surge are likely to experience the most severe weakening in their financial position," said Citi analysts in the report. "Subprime borrowers are most likely to default as they are on weaker financial footing initially and are also most likely to have worse insurance coverage. "


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