NFIP Expiration Date Extended to December
The National Flood Insurance Program (NFIP), administered by Federal Emergency Management Agency (FEMA), was set to expire on September 30, 2017. With consideration for the areas impacted by Irma and Harvey, the US Senate voted to extend the NFIP on September 7; the House of Representatives passed the legislation on September 8th and the President signed it into law later in the day. This is a reprieve but not a solution. The deadline for something to be done is now December 8th 2017.
The new legislation provides 3 months to find a solution. It is time needed for the folks impacted by recent storms and for law makers to come up with a real long term solution. The National Association of Realtors (NAR) advocates a comprehensive re-authorization of the NFIP to cover the 5 million homeowners and 22,000 communities around the US. The NFIP has been extended 17 times and lapsed 4 times between 2008 and 2012. It is time to quit kicking the can down the road and find a long term solution.
Established in 1968, the NFIP has played an essential role in efforts to prevent and recover from flood disasters. Floods are the number one disaster in the US for the number of lives lost and property damage. Flood insurance coverage is mandatory for property in a high risk area where the mortgage is provided by a federally backed or regulated lender.
The NFIP encourages communities to implement flood plain management policies and provides affordable insurance based on flooding risk as determined by the flood insurance rate maps. The preliminary rates maps for Dare County were released last year and lowered the risk for 15,970 buildings. Flood maps are revised every 10 years.
As our previous blog post concluded: “just because you no longer are required to have flood insurance does not mean that you should cancel the policy. A preferred risk policy may reduce the cost and provide valuable protection. It could also be a lower cost option in the long run should the maps revert back. Keeping the insurance in place may also make the property more saleable and provide the additional option of the new owner assuming the insurance policy after the sale.”
“Remember, annually over 20% of all flood insurance claims are from properties not in a designated Special Flood Hazzard Area (SFHA). Operate accordingly.”
Many people do not carry flood insurance unless they are required to. Only an estimated 20% of homeowners in the area affected by Harvey even bothered with flood insurance, a number that has been dropping in recent years. This trend has complicated and driven the NFIP further in debt since the government eventually pays for damages not covered by insurance. Katrina, for example, had a flood insurance payout of $16.3 billion. But Congress authorized supplemental spending of more than $100 billion to provide relief and temporary housing and to fix the broken levies. Harvey and Irma are likely to have a federal cost even higher.
NFIP Impact on Real Estate Sales and Purchases
The NAR released a statement “When the NFIP expired in 2010, over 1,300 home sales were disrupted every day as a result. That’s over 40,000 every month. Flood insurance is required for a mortgage in the 100-year floodplain, but without access to the NFIP, buyers simply couldn’t get a mortgage or vital protection from the No. 1 cause of loss of property and life: flooding.”
“This problem affects far more than coastal communities, and prospective homeowners aren’t the only ones at risk. Policyholders in over 22,000 communities across the country depend on the NFIP to protect homes and businesses from torrential rain, swollen rivers and lakes, snowmelt, failing infrastructure, as well as storm surges and hurricanes. When that lifeline is cut off, the NFIP can’t issue new policies or renew existing residential or commercial policies that expire. That means current home and business owners may find their most important asset unprotected.”
“Last year was the third largest claims payout year in NFIP’s history, costing more than $4 billion. While there were five billion-dollar floods, including Hurricane Matthew, four of the five were inland, and the largest single event was in Baton Rouge, Louisiana in August, just one year out from the NFIP’s expiration date.”
If the NFIP were to expire without a reauthorization or alternative solution, it will prevent new flood insurance policies from being issued. Existing policies will remain in effect but claims could be put on hold until new legislation is passed. There are few private insurers for flood coverage. With NFIP in place, private insurer’s rates need to be competitive with NFIP, which are currently subsidized. If the NFIP were to expire, flood insurance rates could become unaffordable.
The NFIP is over $24.6 billion in debt. Storms like Katrina going back as far as 2005, and Sandy in 2012 have placed the agency in debt before claims for Harvey, Irma and even Marie are even tabulated. Back in 2012, the NFIP was extended for 5 years and called for rate increases. Many coastal residents felt they were bearing the brunt of the increase while not contributing most of the costs of the debt.
Many recent storms had a greater impact inland than on coastal areas. Willo Kelly, Government Affairs Director for the Outer Banks Association of Realtors and Outer Banks Home Builders Association, notes that up until Hurricane Matthew last year, North Carolina policyholders were paying more into the program then they were getting back in claims.
Reauthorizing the NFIP while encouraging the private flood insurance market development can provide options for a stable, affordable and sustainable flood insurance market. Fifty years ago, when the NFIP was created, the private sector had no interest in participating since the risk was high and unpredictable. Today, however, technology has made it easier to manage and predict the risks. Encouraging the private flood insurance market to develop while phasing out the role of the NFIP can provide a long term viable solution.
One reform bill, the 21st Century Flood Reform Act, includes new coastal designations which could result in increased premiums for some property owners. It would include an inland rating and a coastal rating. The bill includes a provision where rates could rise as high at $10k per year, which is unaffordable for most property owners.
Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) in 2012, a five year reauthorization of the NFIP that revised the national mapping program and certain rate increases to achieve fiscal soundness by moving away from subsidized rates to full actuarial rates that are more reflective of risk.
Congress later passed the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA), which repealed certain parts of the 2012 act (BW-12), restored grandfathering, limited certain rate increases and changed the approach for fiscal soundness of the fund by adding an annual surcharge to all policyholders.
Up until 2005 the NFIP was largely self-sustaining. The NFIP covered claims with insurance premiums; and occasionally needed to borrow (and repay) funds from the treasury. Evidence of mismanagement goes back to 2005 with Hurricane Katrina, where claims for uninsured damages were paid out and cost the program millions of dollars in additional losses. Experts argue current rates in North Carolina cover the cost of claims.
Long Term Planning & Management
Critics of the NFIP cite the mere existence of the agency and the subsidized insurance rates encourages development in flood prone areas. As more flood prone land is developed, losses continue to mount.
Repetitive flood losses on the same dwelling without raising the structure or other abatements is not a smart use of resources when flooding is likely to reoccur. There may also be some areas that may require a retreat rather than rebuilding.
There are several Texas communities where the same dwelling(s) has flooded 3 times in the last 3 years. Hard hit is Willow Meadows, Houston, and Meyerland to name a few. Some are seeking a home buyout where the resulting open land could then be used for drainage channels and absorption.
No matter where you may stand on sea level rising, some forecast must be used to predict future potential risks and adopt smarter building practices to minimize losses during a flood event.
It has taken us since 1968 to get to this point and I don’t believe there is a fair solution that will fix the problem overnight. It is likely a phased approach will be needed to implement changes gradually.
Real estate buyers rely on FEMA’s flood maps to determine the flood risk on a property based on what “zone” it’s in. Unfortunately, FEMA’s flood maps are often inaccurate, outdated and not reflective of true flood risk. The result is that some homeowners pay too much, while others pay too little. That’s a problem and inherently not fair.
It is unfair to implement dramatic and sudden premium hikes on homeowners who bought their home before they knew the true risk.
Currently, it can take 10 years to update the maps. As a result, it’s not unusual for homeowners in a lower-risk zone to suddenly discover they’ve been mapped into a higher-risk zone, which means higher premiums. Sometimes much higher.
In some areas, homeowners have spent thousands to raise their property to reduce flood risk, and the potential burden on tax payers. But, what happens when a homeowner raised the property by 2 feet only to find out the new FEMA maps require a 3 foot increase. The homeowner’s investment is wiped away.
Outer Banks communities have been pro-active in managing the flood plains to minimize damage due to flooding. In recognition of the effort, many residents in these communities receive a discount on the flood insurance premiums by reducing the risk. Southern Shores for example, has a rating of class 6 in the community rating program and qualifies for a 20% discount on flood rates.