Hope for Those Hit by High Flood Insurance Premiums

The precarious financial state of the National Flood Insurance Program (NFIP) prompted the passing of the Biggert-Waters Flood Insurance Reform act in 2012. The act was an attempt to find a solution for the $24 billion deficit that the NFIP faced and to take the program to a stronger financial position. As per the provision of the Act, premium subsidies are to be phased out and new flood maps are to be drawn. There are about 5.5 million policy holders in the program and FEMA estimates that about 1.1 million (20%) receive subsidies. Under the Act, those who have second homes and people whose properties are flooded frequently will find their premiums increasing. In addition, over 575,000 policy holders will have to face higher premiums if they sell their homes or if they are subject to severe and frequent flood damage. There is no argument about the need to control the huge financial deficit that the NFIP is operating under so as to prevent the almost certain bankruptcy looming over it. But the hardship that will be faced by so many homeowners and the effect of people selling their homes because of unaffordable flood insurance will have a big negative impact on the real estate market in particular and the economy in general. The Senate has now come up with a measure of relief.

The Compromise

The Senate has joined the House of Representative in passing a compromise $1.1 trillion spending bill that will give some relief to a portion of those who face sharp premium increase. About 25% of policy holders will benefit from this. A bill that would have postponed premium increases by 4 years was expected to be introduced, but has apparently been side tracked. The current provision will only result in a delay of 6 months in the rate increases.

The issue of removing the subsidies is one that has caused passions to rise on both sides of the argument. The short delay in the premium increases has resulted in an increase in the tensions. The Chair of the House Financial Services Committee is a proponent of ‘free market alternatives’ to the existing program and along with other top republicans is not inclined to back away from taking measures to reduce the massive $24 billion deficit. Besides the huge existing deficit the question being asked is if it is fair for taxpayers to subsidize the insurance of the minority who are covered under the program.

On the other side of the argument are those who say that the large rate increases are nothing less than an eviction notice to those who have been paying their premiums regularly for years. And the rise in the number of homes that are for sale for this reason will drive down property value in a market that is still in the recovery stage. Many small coastal communities are afraid that a large number of residents will be forced to give up their homes and the communities would turn into ghost towns. In many cases, these people are required to have flood insurance as a condition to their mortgage.

At present it would seem that the short delay that affects only certain types of homeowners, is all that home owners in flood prone areas can hope for. The speaker of the House of Representative has said that it will not consider any 4 year postponement of the rate increases.

With an unacceptable $24 billion deficit on one hand and the prospect of premium increases that could lead to thousands losing their homes, the stage is set for a tough fight, with no clear winner in sight.

Even though FEMA subsidizes only 20 % of policies, our area is all subsidized. Palo Alto and Menlo Park, for example, are subsidized. The new rules will increase rates up to $6000 and require an elevation certificate $1000 cost for new home purchases or anyone who lets their current policy cancel.

Insurance by Allied brokers has a new private insurance market that offers half priced coverage with no elevation certificate required. Call us for this cutting edge option at: (650) 328-1000 or visit us at http://www.alliedbrokers.com/.

Can Flood Insurance Costs Be Controlled?

In 2012 Congress passed the Biggert-Waters law to enable the National Flood Insurance Program (NFIP) to recover from the verge of bankruptcy. This made sense as the wave of claims after Hurricane Katrina placed an impossible financial burden on the Program. Superstorm Sandy exacerbated the situation. But the financial recovery will be achieved by removing the subsidies that kept insurance costs low. While the need for making the NFIP self-sustaining is obvious, the effect on the subsidy removal on homeowners is huge. Take for example a New Jersey resident whose home suffered major damage when Sandy hit. His insurance premium, he was told, will rise from its current level of $1,000 to $8,000 or $9,000 in the course of the next 5 years. This is because his home is now considered to be in a high risk area. He can expect his flood insurance premiums to increase by about $1,600 every year until the final amount, which FEMA will estimate as the true coverage value, is reached. This kind of increase is expected to not just hit homeowners hard, but even to cause many of them to lose their homes.

The Homeowner’s Flood Insurance Affordability Act

This bipartisan bill was introduced to Congress on the anniversary of Superstorm Sandy and then reintroduced last month. It aims to place a freeze on the majority of flood insurance premium rates until such time as FEMA is able to complete a detailed affordability study and the accuracy of the results are scientifically verified. It also seeks for ways to be found to mitigate the huge burden that the expected major increases in insurance rates will place on homeowners.

Many in New Jersey are still struggling to get back on their feet after Sandy. The increase in flood insurance rates will make the recovery slower, if not impossible. If people are forced out of their homes, property values will drop and this in turn will have a major impact on the overall economic recovery after the natural disaster. In other words, not increasing insurance rates will destroy the NFIP. But increasing them may result in ruining the already damaged economies of the affect regions. But it need not be a lose-lose situation. The Homeowner’s Flood Insurance Affordability Act offers a road map of how both homeowners and the NFIP can remain protected, at least in the short term until the FEMS study is completed, verified and ways to counter the impact of increased rates are found.

The Way Ahead

The proposed legislation will exempt second homes, businesses and properties that are badly damaged or which are subject to repeated flood damage so as to reduce the claims burden of the NFIP and provide some relief to the program. Rates increases can be reduced or delayed. By this process, the number of homeowners who would otherwise drop out of the program should be substantially reduced. Any large departure of policy holders from the program will have a major negative impact on its already overburdened finances.

The need for effective and affordable flood insurance is not limited to only the coastal areas and the northeast. Every state has properties that are covered by the NFIP and so every state will suffer from the effects of rate increases. In turn, the economy of every state, to varying degrees, will be affected. The proposed legislation is supported by the National Association of Realtors, the National Association of Homebuilders, the American Bankers’ Association, the Independent Community Bankers’ Association and the National League of Cities among others.

Major increases in flood insurance premiums will cause many to lose their homes, other to leave the program and damage economies across the country. The passage of this bill offer both short term relief as well as the hope of a viable long term solution.

If you’re buying/selling a property and are wondering how NFIP is going to affect the property’s value, or have any questions related to your insurance, contact Allied Brokers at our website or call us at (650) 328-1000.