Revisiting the National Flood Insurance Program in the Wake of More Flooding

With flooding along the Mississippi River a national headline this week, the House of Representatives is revisiting the National Flood Insurance Program.  As you may recall, last year funding for the NFIP lapsed several times, making it impossible to sell or refinance houses located in a flood zone.  Maxine Waters had a bill in the House of Representatives last year to extend the National Flood Insurance Program for five years, but even though her bill passed the House, it did not pass the Senate.  The Senate merely extended the current program until September 30, 2011.

On Friday, May 13, 2011, HR 1309, the National Flood Insurance Reform Act of 2011, unanimously passed the House Financial Services Committee and will now head to the floor for a vote.  Introduced by Judy Biggert, (R-IL), this bill will extend the National Flood Insurance program for five years, until 2016.  But, unlike some of the past bills that have attempted to extend the flood insurance program, HR 1309 addresses some of the biggest problems of the NFIP.

Undoubtedly, the biggest single problem with the NFIP is that it is currently $18 billion in debt to the U.S. Treasury with no hope of being able to pay back the money it has borrowed. Unlike other insurance programs that are required to retain a reserve against emergencies, the NFIP uses the U.S. Treasury as its reserve.  The program lost billions paying for the damage caused by Hurricane Katrina and the other hurricanes of 2005, and it has not been able to recoup those losses. Now, with flooding along the Mississippi River, the program will be paying out billions more in flood insurance. 

Part of the problem with the NFIP is that the program is mainly utilized by people living in areas that flood.  For example,the Florida Disaster website, which is managed by the Florida Division of Emergency Management, states that the state of Florida has 18.5 million residents and 80% of them live or do business on or near the coastline. Ninety-seven percent of Florida communities participate in the National Flood Insurance Program, and as of December 31, 2010, there are over 2 million flood insurance policies in Florida, representing 37% of nationwide policies and totalling 1.2 billion dollars in insurance coverage. (Source http://www.floridadisaster.org/)

Traditional insurance spreads risk by getting a large number of people into a pool, including those who, hopefully will never have need of the particular coverage being offered.  And that is certainly what FEMA has been attempting to do with its ad campaign to get all homeowners to purchase flood insurance voluntarily. The "Hillsboro Reporter" quotes the Region 6 FEMA administrator Tony Russell, "While many people are required  by mortgage and lending companies to have flood insurance, FEMA and the National Flood Insurance Program (NFIP) strongly recommend that everyone have flood insurance...The reason is simple, 'You don't have to be in mapped flood plain to flood.'"  Other representatives of FEMA have been quoted as saying, "We all live in a flood plain."

FEMA has also redrawn the flood maps to put more residents into flood plains, including those who have only a very slight chance of flooding.  By requiring that those people with less risk of actually flooding paying into the system, they can shore up revenues.

Unfortunately for FEMA, and fortunately for the rest of us, we don't all live in a flood plain.  My office building sits high on the street.  When rains came that flooded most of El Paso in 2006, I got a small amount of water under the garage door, and that was it.  And for many people in Texas and in New Mexico, there is no real chance of ever flooding, so we would be paying for flood insurance that we would never use.  Just to get an idea of what flood insurance would cost, I put my office address into the floodsmart.gov website and pulled up a quote.  The area is listed as "moderate to low risk,".  For a policy with a $1000 building deductible, and coverage that would cover the note completely, the premium would be $1447.00 per year.   The Flood Smart quote states clearly that the insurance will not pay replacement cost, and that the claims will be settled using the depreciated actual cash value of the building.  Also, business interruption insurance is not available through the program.  That sounds like very little coverage for $1447 a year.

Southern New Mexico Congressman Steve Pearce, (R-NM) who actually represents the district where I live, has added an amendment to HR 1309 to remove federal mandates for those who actually should not be in flood zones. "During this difficult economic time, New Mexicans cannot afford to pay for federally mandated flood insurance that they don't need."  On his website, Pearce tells the story of a constituent in Tularosa "whose home is seventy feet above the river.  Her home is listed in the flood plain, but the river itself is not."   (Tularosa is in the southern New Mexico desert, where flooding is extremely unlikely.)

To address some of these issues, HR 1309 creates a "Technical Mapping Advisory Council" consisting of the administrator of FEMA or his designee, the Director of the U.S. Geological Survey Department of the Interior, the Under Secretary of Commerce for Oceans and Atmosphere, the Commanding Officer of the U.S. Army Corps of Engineers, the chief of the Natural Resources of Conservation Service of the Department of Agriculture, the Director of the U.S. Fish and Wildlife Service of the Department of the Interior, and the Assistant Administrator for Fisheries of the National Oceanic and Atmospheric Administration of the Department of Commerce, or the designees of each of these individuals.  Additionally, the Administrator of FEMA shall appoint 9 members who will be experts representing each of the following areas of specialization, 1. data management, 2. real estate, 3. insurance, 4. regional flood and storm water management organization; 5. a State emergency management agency or association; 6. a professional surveying association; 7. a mapping association;  8. an engineering association; 9. an association representing flood hazard determination firms. The members are to be appointed based on knowledge and competence in the areas of surveying, cartography, remote sensing, and technical aspects of flood insurance rate map preparation.

This Council will be charged with the responsibility of proposing new mapping standards to "ensure that flood insurance rate maps reflect true risk, including graduated risk that better reflects risk to each property; such reflection of risk should be at the smallest geographic level possible...to ensure that communities are mapped in a manner that takes into consideration different risk levels in the community."  By having a professional council set new standards for the maps, Congress is hoping to correct some of the problems that have been created by placing a lot more homes in flood zones over the past few years.

Finally, HR 1309 mandates that FEMA and the Government Accountability Office assess options for the privatization of the flood insurance program.  Privatization could take the stress off of taxpayers, who currently owe $160.00 per U.S. household to cover the $18 billion dollars owed by the NFIP to the U.S. Treasury--about six times more than the NFIP currently collects in premiums.  Craig Fulgate, director of FEMA, testified before Congress in April that "FEMA is unlikely to pay off its full debt, especially if it faces catastrophic loss years."

HR 1309 has bipartisan support so sponsors are hoping to get it to the president's desk before September 30 when the current funding for NFIP expires.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen.  For more information, visit her website at  http://www.frontier2000.net/.

Good News and Bad News About Flood Insurance

On this Monday morning, there is both good news and bad news about flood insurance. The good news is that flood insurance is once again available. At the end of June, Congress extended the flood insurance program through September, so buyers should be able to complete the homebuying season without other interruptions. The bad news is that a lot more people are going to need flood insurance, starting next year.

In El Paso, our new maps were released yesterday and made public today. They cover much of the Upper Valley, identifying the area as a flood zone and requiring flood insurance. The new maps go into effect next year (mid 2011) but the window of time for appealing new flood zone status begins today and lasts through October 18. If your house is in a flood zone, you need to hire an engineer or a surveyor and they will show their findings to FEMA to appeal their decision to designate your property as being in a flood zone. From October 18 to December 18 FEMA will process all of the appeals, and then the final maps will become effective, probably in June of 2011.

Understanding the new flood zones is critical for homeowners and homebuyers alike. Just because a home currently is not in a flood zone does not mean that it is not going to be with the new maps, so it is important to take the time to find out as soon as possible, or else buyers may find themselves surprised by a notice that they are required to buy flood insurance next year about this time.

The irony of remapping our city just at this time is that the International Water and Boundary commission is currently spending $220 million to build levees in the Upper Valley to prevent future flooding such as what we saw in 2006. Federal stimulus money is covering the cost of the project, but it will not be finished until sometime next year.

After the levee is finished, then homeowners have the right to appeal again but that can take up to two years to process and in the meantime you will have to pay for the flood insurance.

Of course, El Paso is not the only community being affected by this. The new flood maps are affecting the entire nation. An article in the Houston Chronicle on May 23, 2010 states that 17 counties along the Texas coast will be designated as flood zones. Even though Galveston County and Brazoria and Jefferson Counties have built levees to prevent flooding, the levees were started in 1962 and completed in the 1980s so they probably will not meet current FEMA standards. All levees must be certified within two years after the new data is ready, but at an estimated cost of $250 million to $350 million to meet the new standards, Galveston County says it does not have the money and does not think it can get it. In nearby Jefferson County, the estimated cost of bringing the levee protecting Port Arthur up to code is about $500 million.

According to the Houston Chronicle article, this problem is happening nationwide and not just here in Texas. State leaders from all over the country are asking FEMA to extend the deadline and pressuring Congress to write new legislation that would prohibit FEMA from updating the flood maps if a plan exists to upgrade the existing levee system and if residents have been warned about the risk of flooding. But remember that flood insurance is required for properties that have more than a 1% chance of flooding, so you can be in an area where your real risk is quite small, but you will still be required to buy flood insurance.

Last week, the House of Representatives passed HR 5114, the Flood Insurance Reform Priorities Act, sponsored by Maxine Waters (D-CA) and Barney Frank (D-MA), which we have discussed in some depth. (See The River is Rising and the River is still Rising from May and June). That bill would extend the flood insurance program for five years, but it would also raise the cap on premium increases from 10-20%. While this bill is not expected to pass the Senate, it is a reminder that shoring up the ailing National Flood Insurance Program is a priority for Congress. But shoring it up at what cost? According to the Houston Chronicle, Galveston County Judge Jim Yarbrough sent a letter to Senator Kay Bailey Hutchinson stating that if the levee protecting Texas City failed cerfication, the cost of insurance to homeowners could rise from $500 per year to $5000 per year. That is a big enough increase to force people out of their homes, particularly in the gulf region which has been hard hit by the oil spill, the loss of tourism and the moratorium on drilling.

So what should homeowners do? A good stop-gap plan is to be proactive. The local flood maps are available at www.elpasotexas.gov. If you live in an area designated as a flood zone, it might be prudent to buy flood insurance now at the 2010 rate before the new maps become active. At least that way, you are buying in at the current rates. And for home buyers out looking to purchase a new home this summer, find out whether your dream home is in one of the newly mapped flood zones. A little research today can save a lot of headaches a few months from now.

A Historic Day

Today is a big day for the real estate and mortgage world. Early this morning, the House and Senate conference committee agreed to the final text of HR 4173, the Restoring American Financial Stability Act. The final conference text will now go to the full House and Senate for a final vote and then the bill will be off to the President's desk for his signature prior to that all important July 4 deadline.

The legislation is being touted as historic--"the greatest financial overhaul since the great Depression." I agree fully, but I would like to remind everyone that historic does not necessarily mean "good." The bombing of Pearl Harbor, 9/11 and Hitler's invasion of Poland were all historic events but none of them turned out well. In fact, since I have a master's degree in history and I taught history for four years on the junior college level, I can say with some degree of certainty that most genuinely historic events are negative. History books do not have their pages filled with happy stories of content, prosperous people anymore than newspapers do.

Next week we will start breaking down what is in and out of the bill. But today is important for more than just financial reform. In the wee hours of the morning, the Senate voted down a jobs bill to extend unemployment benefits. The tax credit deadline extension which was passed by the House of Representatives was attached to this bill. So was re-funding for the National Flood Insurance Program. Since the bill was expected to pass, we were fairly confident that the tax credit would be extended through September. But with the bill killed this morning, the original June 30 deadline remains.

Many last minute borrowers who were trying to take advantage of the first time homebuyer tax credit by signing their contracts on or before April 30 and closing on or before June 30 have experienced delays in underwriting closing and funding due to new underwriting guidelines, delays caused by dropping rates which caused a glut of refinances during the time that the loans were being underwritten, and delays caused by the bank holders of short sales and foreclosures. Often, banks and relocation companies have their own internal delays so that they can review their documents prior to closing, which can delay a closing as much as 72 hours.

To me, a 90 day extension seemed excessive, because a contract that was signed in April probably is pretty close to being ready to close. Perhaps thirty days would adequately cover the delays caused by last minute problems. But perhaps not--it would depend on what each file needed individually in order to be able to close.

The National Association of Realtors is estimating that up to 25% of home buyers will not be able to take advantage of the tax credit if the deadline is not extended--that is about 180,000 borrowers. Of course, these people can still close when their paperwork is ready, but if they know that they are not going to get the tax credit, will they want to? And if they choose not to, what effect will that have on the housing market, since new contracts are now dipping since the tax credit ended.

It would be interesting to know how many of these borrowers who wanted to take advantage of the tax credit have had their closing delayed because their property requires flood insurance. As you recall, the funding for NFIP expired at the end of May, so we are now 25 days with no new flood policies. Congress has estimated that this lack of flood insurance has kept 1300 homes from closing per day. Now on day 25, that would be 32,500 homes and counting.

Here's an idea--rather than tying these two bills to a bill to extend jobless benefits, why didn't somebody just write a small bill for just these two iteme, take it in, vote on it, and then take it over to the Senate and vote on it there. At least we could have an up or down vote on these issues rather than a prolonged fight over bigger issues ending in defeat on these.

I read one commentary that predicts that Harry Reid will just find another bill to attach these items to and pass it before June 30. But I would not count on that--he would need to move awfully fast to have this finished by Wednesday. Rather, I imagine that a lot of closers and loan officers will be working until midnight June 28, 29, and 30.

Finally, today is historic for one other reason. Mortgage rates are the lowest they have ever been in the history of records. The 15 year mortgage rate today is about 3.875%. Of course, individuals have to meet credit and income guidelines and stricter qualification requirements, but still even to have an opportunity to refinance at a fixed rate under 4% is amazing and noteworthy. And that is the type of history we will want to remember.

The River is Still Rising

On May 11, this blog was devoted to the lapses in coverage for the National Flood Insurance Program. NFIP's funding has to be authorized by Congress, and it has experienced several lapses this year alone, including a 20 day lapse in April. The program had been refunded through May 31, 2010, pending votes on HR 5114 by Maxine Waters (D CA) and its companion bill HR 5522 offered by Barney Frank (D. MA). These two bills would reauthorize the flood insurance program through 2015 and provide for expanding mandatory coverage for homeowners who are currently living in zones that have been remapped by FEMA as flood zones. These homeowners have not been required to pay flood insurance in the past, but they will be required to obtain this coverage going forward.

As of May 31, 2010, Congress had not reauthorized funding for NFIP, so the flood insurance program is again defunded, and no new flood insurance policies can be issued. Now 9 days into June, during the peak of the homebuying season (which is traditionally Memorial Day to Labor Day) this inability to close loans on properties which require flood insurance is certain to put a damper on summer sales. Congress estimates that for each day that NFIP remains unfunded, 1400 buyers are unable to close on their homes nationwide. I do not know whether this figure is adjusted seasonally, since certainly the real estate industry is subject to seasonal cycles, but assuming that the 1400 homes figure does not need adjustment, 12,600 buyers would have failed to close in this 9 days alone.

FEMA's website has guidance posted for dealing with the lapse of funding for NFIP, including an FAQ section. Basically, a person who had his application for flood insurance submitted and approved can be covered--anyone who did not will have to wait until Congress reauthorizes the program. The FEMA FAQs state that there is normally a thirty day waiting period for flood insurance to go into effect, but if the flood insurance is being obtained in connection with a loan, there is no waiting period. For policies that have a waiting period, if Congress funds the NFIP retroactively, the waiting period would begin May 31. Claims will be paid on existing policies during the program hiatus.

Why would Congress allow funding to lapse on such an important insurance program at just the time of year when its absence would be felt the most? Probably because rather than just tying funding to another bill, as they have the last few times that they have authorized additional funds for NFIP, Congressional leaders are hoping to secure passage of HR 5114. The Congressional Budget Office completed its cost estimate of the new bill on May 17, 2010, and the results are available on line at the CBO website.

FEMA requires flood insurance for properties located in areas which have a 1% or better chance of flooding. Under the current law, about 20% of the flood insurance policies are subsidized at about a 60% discount because the properties were constructed before the community flood insurance maps were written, or before 1975.

According to the CBO report, Congress established the National Flood Insurance Fund as the only source to play claims and other expenses associated with the National Flood insurance program. In addition to raising money through premiums, fee income, and earned interest on fund balances, the National Flood Insurance Fund has the authority to borrow from the US Treasury (up to $20.775 billion). However, because of the 2005 hurricane season, the NFIP owes $18.75 billion to the treasury as of May 2010. (This is interesting because the paragraph 3 of HR 5255 states that "several years of below average flood claim losses and increased voluntary participation in the National Flood Insurance have allowed the program to fully service the debt incurred following Hurricanes Katrina and Rita and allowed the program to pay $598,000,000 of the principle of that outstanding debt." That sounds impressive unless you understand that the debt repayment is less than 5% of debt itself.)

HR 5114 will authorize the National Flood Insurance program for an additional 5 years, so upon passage there should be no more lapses in funding until 2015. As of January of 2010, NFIP had 5.6 million policies in force and receives about $3.2 billion in premiums. HR 5114 will bring some extra funds into the coffers by doing the following:

Increasing premiums for policyholders who are currently paying discounted premiums; gradually implementing and increasing premiums for homeowners who are in recently remapped flood zones; increasing the deductible for some policyholders; increasing the limit of average annual premium growth; increasing the maximum coverages for structures and contents and introducing new lines of coverage. The bill will also increase civil penalties from the current rate of $350 to 2000 per violation for lenders who do not enforce NFIP purchase and notification requirements for mortgagors and will increase the maximum penalties which can be levied against a financial institution in one year from $100,000 to $1,000,000, with no limit for any institution fined at the maximum level for three out of the previous five years. These fines and penalites alone are estimated to bring in an additional $1,000,000 per year.

By increasing deductibles, the CBO estimates that the bill will reduce claims by less than 5%. By raising premiums, the CBO estimates that the bill will increase income by $2.8 billion from 2011-2020, and if the increased premiums cause some policy holders who are currently having their premiums subsidized to let their policies lapse, the CBO estimates that this will result in a net savings to program costs of $50 million a year over the next 10 years. That $50 million a year being saved because homeowners dropped their policies can in turn be used to pay for the outreach program that FEMA will be starting to "encourage and facilitate the purchase of flood insurance coverage by property owners and renters and to increase public awareness of flood risk retention." This new outreach program will cost an estimated $222 million over the 2011-2015 period.

NFIP is going to incur some other new expenses in addition. HR 5114 authorizes $476 million dollars between 2011 and 2015 for mitigation and outreach and to establish the Office of the Flood Insurance Advocate, which will operate at an estimated cost of $23 million over the next five years. Why does every new federal bill create and fund another government agency? HR 5114 would authorize FEMA to undertake studies and issue reports on the national flood insurance program which are estimated to cost about $1 million in 2011. FEMA will have up to $40 million a year to extend its Severe Repetitive Loss Mitigation Pilot Program to provide grants for up to 75% (in some cases 90%) of the cost of projects to reduce flooding to areas that have flooded at least four times in history or received two payments that exceed the market value of the structure.

Finally, HR 5114 will create another mandatory disclosure. The bill will require mortgage originators to include specific information about the availability of flood insurance on each good faith estimate. (That way the borrower can see how much flood insurance would cost, whether they are required to have it or not.)

Overall, the CBO estimates the changes in HR 5114 will increase net income to the National Flood Insurance Program by $3.2 billion over the next ten years, but they also estimate that these funds will be spent on claims, so while the NFIP will look a little better financially than it does today, it apparently still will not have the money to pay back all of the $18 billion dollars in loans still owed to the U.S. Treasury.