Some property owners have been getting socked with huge increases in flood insurance premiums due to a federal law that was enacted in July 2012. The large rate increases have caused a backlash, and efforts are under way to amend the offending legislation, the Biggert-Waters Flood Insurance Reform Act of 2012.
One of the ways that the new, high insurance rate is triggered is when a home is sold. Al Suguitan, president and chief operating officer of the Greater Gateway Association of Realtors, says it is causing some home sales to fall through when buyers discover what the new insurance rates will be.
Since the National Flood Insurance Program began in 1968, flood insurance rates have been subsidized. The Biggert-Waters Act, signed into law by President Barack Obama on July 6, 2012, immediately eliminated subsidies for about 438,000 NFIP policies. Subsidies still exist on an estimated 715,000 policies across the nation, but those will eventually be phased out.
With large-scale natural disasters like Hurricane Katrina in 2005, the Federal Emergency Management Agency has been saddled with mounting debt. In July, the U.S. Government Accounting Office issued a report on the NFIP. The GAO found that FEMA, which administers the program, collected $3.5 billion in premiums during 2012 and FEMA estimated that about 1.1 million of 5.5 million NFIP policies - some 20 percent - were sold at highly discounted rates that did not fully reflect the actual risk of flooding.
Since 2000, the report further states, the NFIP has experienced several years with catastrophic losses - losses exceeding $1 billion - and has needed to borrow money from the U.S. Treasury to cover claims in some years. The losses resulting from Superstorm Sandy, which caused extensive damage in several states on the eastern coast of the U.S. in October 2012, also are expected to be catastrophic. As of May 2013, FEMA owed the Treasury $24 billion - up from $17.8 billion prior to Superstorm Sandy - and had not repaid any principal on its loans since 2010.
The Biggert-Waters Act aimed to put the NFIP on a sound financial footing by gradually eliminating these NFIP subsidies. It did this by removing subsidized rates for some existing polices, by increasing premiums 25 percent annually up to market rates on non-primary residential properties, severe repetitive loss properties, flood-damaged properties which have received payments equal to or exceeding fair market value, business properties and substantially damaged or substantially improved properties, while excluding such property types from future subsidized ratings. It prohibited subsidized rates for new policies, for newly purchased properties and for policies that have been allowed to lapse. And, it increased the annual limitation on premium increases from 10 percent to 20 percent.
Since the bill took effect, the National Association of Realtors, supported by its state affiliates, has been working to amend it.
“In general, we want properties to be insured and protected, but also affordable, and there is concern by the NAR (National Association of Realtors) and the IAR (Illinois Association of Realtors) that properties will no longer be affordable because of this particular implementation of the Biggert-Waters Act,” said Sharon Gorrell, housing policy adviser for the IAR.
As part of the effort to make the flood insurance program solvent, FEMA is also updating its Flood Insurance Rate Maps, says Gorrell. It is using more modern technology to draw them and more properties are falling within the flood boundaries, she says. Any mortgage backed by one of the Government-Sponsored Enterprises (Fannie Mae or Freddie Mac) requires flood insurance if the property is in a flood zone.
Flood zones are different from floodplains. Flood zones are areas where water levels can rise under certain conditions: a heavy rain or a flooding creek, for example. Suguitan says he is aware of an area in Wood River where one house is not in a flood zone but another - just six houses away - is.
In July, the NAR successfully pushed for a House amendment to the Homeland Security Appropriations Bill to delay the implementation of higher NFIP rates for “grandfathered” properties. The amended bill was passed by the House and the NAR is now working with Senators Mary Landrieu (D-LA) and David Vitter (R-LA) to include the delay in the Senate version of the Homeland Security bill.
Jamie Gregory, deputy chief lobbyist for the National Association of Realtors, says the reprieve would only be for one year but that the delay would buy time to devise a real fix. One of the odd things about the flood insurance program, says Gregory, is that it impacts mostly people on the ends of the income spectrum: wealthy people who have vacation homes along the coasts and poor people who often live in old, flood-prone communities. He says FEMA is conducting an affordability study to see who would be most negatively impacted by higher rates.
“I think it makes sense to hold off until FEMA’s affordability study is done so people can understand how people are impacted,” said Gregory. “That’s what Sen. Landrieu is trying to do. She’s trying to give FEMA an opportunity to finish the study. But it’s a real balancing act because you have people in Congress who don’t believe the program should exist at all. They’re forgetting why it was created in 1968 to begin with.”
Gregory says he was optimistic that the amendment would pass, but he expected it to go right down to the wire. Congress is currently in its summer recess and is scheduled to meet only nine more days before the session ends Sept. 30.