More white knuckles for lenders as flood insurance deadline approaches

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WASHINGTON — Once again, congressional inaction on reauthorizing the National Flood Insurance Program is prompting concerns about mortgage closings stalling if lawmakers miss a key deadline.

Congress has until July 31 to renew the program or risk a lapse in coverage, which would create a new round of headaches for lenders and real estate agents. Home sales in high-risk flood areas could stall, and policyholders would be unable to renew their insurance in the middle of hurricane season.

On June 28, the Senate passed a farm bill that included an amendment sponsored by Sens. John Kennedy and Bill Cassidy, both Louisiana Republicans, to extend the NFIP for six months. However, the House has yet to take up the bill with just weeks left until the deadline.

“It’s a very important topic as we’re coming to the end of this month,” said Lawrence Yun, the chief economist and senior vice president of research at the National Association of Realtors. “Constant renewal of flood insurance is not a confidence-building measure, but one cannot suddenly unplug it.”

The program provides flood insurance to 5 million property owners, renters and businesses. Those looking to buy property in certain flood areas designated by the Federal Emergency Management Agency are required to purchase flood insurance in order to qualify for a mortgage. Private flood insurance is often pricey, and might not even be available in certain locations especially prone to flooding.

“The program is essential because by design, it is the only game in town when it comes to flood insurance for most properties,” said Joseph Pigg, a senior vice president of mortgage finance at the American Bankers Association.

Although the program may be essential, Congress has had to reauthorize it six times since September 2017, as it has been unable to pass broader legislation to reform the program and extend it for a longer period of time.

“Allowing the National Flood Insurance Program to expire would be devastating to my state,” said Kennedy. “Louisiana families and businesses rely on the NFIP to help them after the storm hits.”

If the program were to lapse, there would be about 40,000 fewer home sales per month, Yun said.

During the summer of 2010, the NFIP was not reauthorized for a month, and as a result, 1,400 home sales each day were canceled or delayed, according to the Realtor association.

“What we’ve seen in the past is every time the program comes up for reauthorization, there’s usually these periods of short-term authorization because it takes the House and the Senate quite a while to come to a compromise,” said Pigg.

These repeated short-term authorizations could have a serious impact on consumer confidence, Yun said.

“If the consumers don’t know whether flood insurance will be available or not into the future … maybe they just get put off by the fact that there’s constant uncertainty,” he said.

One challenge for Congress in attempting to pass flood insurance reform legislation in the past has been that, unlike other issues, a lawmaker's views on the NFIP is not determined by political party. Instead, lawmakers in high-risk flood areas have an interest in keeping the program affordable, while congressmen in locations that aren’t prone to flooding want to keep the program “actuarially sound,” Pigg said.

In November, the House passed a bill to extend the NFIP for five years and to allow private insurers to underwrite and sell private flood insurance policies in connection with guaranteed mortgages from Fannie Mae, Freddie Mac and the Federal Housing Administration.

However, the Senate has yet to take up this bill, and the issue remains contentious. A spokesman for Sen. Robert Menendez, D-N.J., called the bill a “nonstarter.”

Congress passed the Biggert-Waters Act in 2012 to reform the program, but further legislative efforts since then have stalled.

“It needs to be modernized and it needs to be made actuarially sound, but that’s really complicated because it’s been subsidized over the years and if you eliminate those subsidies too fast, you end up with a credit shock for people,” Pigg said.

In the “unlikely event” the program were to lapse at the end of the month, a FEMA spokesperson said, the NFIP would still continue to pay claims on existing flood insurance policies.

“However, if the authorization lapses, FEMA must stop selling and renewing policies for millions of properties in communities across the nation,” the spokesperson said.

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Flood insurance Mortgages Natural disasters Policymaking FEMA American Bankers Association NAR