Bill Would Make Flood Insurance More Expensive on Vacation Homes

The House has passed a flood insurance reform bill by a 416-4 vote that phases out subsidized premiums on vacation/second homes and commercial properties - impacting an estimated 450,000 properties.

In phasing out the subsidies, the Federal Emergency Management Agency can increase premiums by 15% a year. However, FEMA can also increase overall premiums for actuarial reasons by another 15%. This means a vacation homeowner could get hit with a 30% increase.

"Premiums will increase, or may increase, up to a maximum of 30% per year," said Rep. Richard Baker, R-La., sponsor of the flood insurance reform bill (H.R. 4973.)

House Financial Services Committee chairman Michael Oxley, R-Ohio, said the bill is aimed at making the National Flood Insurance Program more actuarially sound by phasing out the subsidiaries enjoyed by owners of vacation and second homes. "If you can afford one of those homes, you can afford to pay the freight," Rep. Oxley said.

However, analysts at the Congressional Budget Office expect some property owners will drop or reduce their flood insurance coverage because of the higher premiums.

"As a result, the Congress might be under increased pressure to appropriate funds for disaster relief in the event of a major flood," CBO said.

During congressional debate, the House agreed that subsidized premiums on homes built before 1975 or before the first flood insurance rate maps (FIRM) were completed should not be passed on to new buyers.

The House approved an amendment by Rep. Scott Garrett, R-N.J., that phases in full flood insurance premiums on purchasers of pre-FIRM homes at 15% per year.

"My amendment would simply require any purchaser of a pre-FIRM residential home to pay a phased-in actuarially correct flood insurance price," Rep. Garrett said.

H.R. 4973 also increases penalties on mortgage lenders who fail to require the purchase of flood insurance or allow coverage to lapse during the life of the mortgage.

The Flood Insurance and Modernization Act raises the penalties for lender noncompliance from $350 to $2,000 per violation with a $1 million cap. "For those lending institutions that drop the ball on enforcing mandatory insurance purchase requirements, fines will be tripled from where they are now," Rep. Oxley said.

The Independent Community Bankers of America opposes the increase in penalties. However, ICBA pointed out that the House bill has a "good faith" exemption for lenders that make a reasonable attempt to comply.

The House bill also requires notice of availability of flood insurance on all homes and the availability of escrows for flood insurance premiums in Real Estate Settlement Procedures Act disclosures - known as the good-faith estimate.

A flood insurance bill approved by the Senate Banking Committee requires flood insurance escrows for new and existing mortgages. Some lender groups oppose this retroactive proposal and they are trying to knock it out of the bill.

The Senate bill would phase-out subsidized premiums for vacation/second homes, commercial properties and properties that repeatedly suffer major flood damage. It also increases penalties for lenders that drop the ball on enforcing mandatory flood insurance purchase requirements.

Senate Banking Committee chairman Richard Shelby, R-Ala., wants the Senate to pass his flood insurance bill before Congress adjourns for an August recess. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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