Industry Victory on Flood Insurance Will Be Taxpayers' Loss

Lenders and Realtors are happy about a new law that blocks potentially huge increases in federal flood insurance premiums. But if predictions about sea level rise by the federal government are anywhere near correct, taxpayers will soon be on the hook for a lot more than the current roughly $25 billion shortfall in revenue at the National Flood Insurance Program.

The potential taxpayer liability is impossible to gauge precisely, as it will depend on unpredictable natural events. But according to a study commissioned by the Federal Emergency Management Agency, assuming the shoreline remains fixed, "the typical increase in the coastal [flood hazard area] is projected to…be about 55% by the year 2100." As a result, the number of coastal flood insurance policies could increase as much as 130% in this scenario, the study says.

The current exposure is daunting enough. According to a report by Shiva Polefka, a research associate at the Center for American Progress, a progressive think tank, $3.5 billion a year (FEMA's number) in NFIP premiums support $527 billion in coastal flood plain liabilities (the National Oceanic and Atmospheric Administration'snumber) and the program has incurred a shortfall estimated at $24 billion to $28 billion.

The lending and real estate industries seem less concerned about the potential taxpayer losses than they are by their clients' potential suffering from increased premiums. The Biggert-Waters Flood Reform Act, passed by Congress in 2012, prompted huge increases in flood insurance premiums to help bring the program out of its current deficit hole. The industry argued this would hurt housing affordability and home values by slowing real estate sales and financing.

The lenders and Realtors have clearly won this round. Last month, President Obama signed a bill which would delay those premium hikes. Even Rep. Maxine Waters, D-Calif., the "Waters" in Biggert-Waters, stumped for relief from provisions in the very law she co-authored that called for the flood insurance program to be actuarially sound (in other words, to raise premiums).

"I am concerned for the hundreds of thousands of middle class families who are struggling to figure out how they will afford flood insurance costs that have increased by, in some cases, tens of thousands of dollars," she said after a House vote blocked consideration of an earlier Senate version of the bill delaying premiums.

She called for a four-year delay in the premium increases and an affordability study to be submitted by FEMA to Congress.

Lender reaction to passage was clear, with American Bankers Association president Frank Keating saying the new law quashed the "unintended consequences" of Biggert-Waters.

National Association of Realtors president Steve Brown applauded the "commonsense solution" in the new law. He said Realtor clients early on reported "the drastic problems they were encountering such as exorbitant rate hikes and wildly inaccurate rate quotes."

Brown congratulated Realtors for bombarding Congress with 300,000 letters and more than 11,000 phone calls to lobby against the rate hikes. The new law would "delay the rate hikes from being implemented immediately," he says. "It also provides tools to address inaccurate premiums and studies the impact on affordability." Jenny Werwa, a spokeswoman for the trade group, supplied Realtor Congressional testimony attesting to premium rises of as high as $28,000.

Polefka has endorsed an idea to mitigate the effects of Mother Nature—one that lenders and Realtors are unlikely to jump up and down about, since it would reduce real estate inventory.

In his report, entitled "Moving Out of Harm's Way," the ocean policy analyst writes that the best option may be "publicly funded buyouts of flood-prone coastal properties, in which the lands are restored to their natural states and then turned over to state ownership." This would help create a buffer zone against future flooding.

Werwa says the Realtors are focused on the new law, though she says "there is money in the law to look at the buyout option." But that, she says, would be a state issue. "It's up to them."

Polefka notes that some states have already implemented buyouts. For instance, in the wake of huge flooding of the Mississippi River in the early 1990s, "Missouri launched a program to buy out 'repetitive-loss' buildings in the river’s floodplain—homes in flood-prone areas that had been known to draw repeated flood-insurance payouts. Between 1995 and 2008, FEMA and the state of Missouri invested roughly $75 million to purchase 4,045 repetitive-loss properties across eight eastern counties." A 2009 analysis of subsequent disasters by the state and FEMA found this program had avoided $97 million in losses just on the 885 properties for which adequate data was available and which had buildings on them.

Interestingly, there is some agreement across the aisles of this issue.

Polefka, for instance, is sympathetic to the premium affordability argument. "For lower-income households," he writes, "these new rates may not only be onerous, but they could also affect resale values as potential buyers balk at the increased cost of ownership.

"As Congress re-evaluates [Biggert-Waters] reforms at the behest of constituents facing premium increases, it should focus strictly on alleviating short-run pain among low- and middle-income coastal residents by, for example, lengthening the phase-in period for the higher rates while preserving the substance of the law’s vital reforms."

And Polefka's concerns that the NFIP program should be actuarially sound are shared by some in Congress who want to limit taxpayer liability and bigger government, such as House Financial Services Committee Chairman Jeb Hensarling, R-Texas.

The country cannot afford to ignore this issue. NOAA has measured rising sea levels of nearly a foot in the past one hundred years at New York's Battery Park, Polefka notes in his report. Visible from where this column is being written, this low-lying area suffered devastating flooding from Hurricane Sandy.

It's a good thing our office is on the 26th floor.

Mark Fogarty, Editor at Large at National Mortgage News, is starting a regular blog of analysis and commentary based on his 30 years covering the mortgage industry.