Bigdog,
Since FEMA has the call on who can and who cannot purchase flood insurance, coupled with the requirement most banks have to qualify for FANNIE/MAE support, if FEMA says you need to purchase flood insurance and if you need a mortgage to close the deal, you have to buy the insurance.
The only alternative I am aware of is going to a private mortgage lender, but they will likely have a higher interest rate, most likely higher than the going non-private rate plus the flood insurance premium.
Sorry to hear of your situation, but that is the way the FEMA flood protection goes in the post-banking-meltdown days. A local bank might have a better deal, but I doubt it.
Good Luck in whatever you do,
R2B
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