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People still have the option to live without insurance.

Perhaps you just decide that you're gonna keep everything that matters upstairs in your house, and the downstairs flooding a couple of times a year is worth it for the substantial reduction in house price.

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I don't think you can have a mortgage without insurance to at least cover the bank's portion. If you own the house with cash then possibly.

In which case, there might be a market for mortgages for those in this position... Or perhaps a (far cheaper) insurance product that only insures the banks interest in the house (ie. after a flood, if the homeowner walks away, the insurance compensates the bank).

I don't think there's a market for paying out $20,000 in flood damage every five years in exchange for a $2,000/yr premium. The mortgage providers also don't want to be in a situation where someone owes $160,000 on a house needing $60,000 that the owner can't obtain in repairs or worth $80,000 in a damaged state as that just encourages the owner to walk away and declare bankruptcy, which is not good for the bank. The only way capitalism has of solving this is to roll the effective equivalent of market rate insurance premiums into the mortgage cost, so you've just moved the problem from "the insurance I need for my mortgage is too expensive" to "my mortgage is too expensive".

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