Homeowners in flood plains across the country breathed a sigh of relief in March, when Congress passed and the President signed legislation that staved off a wave of flood insurance premium increases called for by the Biggert-Waters Flood Insurance Reform and Modernization Act of 2012.
The Biggert Waters legislation, among other things, called for flood insurance premiums to be set to a level that accurately reflected the expected damages from flooding for every individual property in the National Flood Insurance Program.
It sounds like common sense. Reform was desperately needed. The National Flood Insurance Program was deep in red ink. But the law ran into political trouble almost as soon as it was passed. The 2012 law doubled scheduled rate increases for covered properties from 10 percent to 20 percent. For certain properties, rates could be increased as much as 25 percent every year. And some previously uninsured properties had premiums that would outstrip the value of the entire property itself within a few years if something wasn’t done.
As it stood, the NFIP was nearly $20 billion in debt. If it were a private company, it would be insolvent, as expected liabilities vastly exceeded assets. The program had recently sought and received a large taxpayer bailout – which critics said was a massive subsidy from renters and working class Americans to wealthier coastal homeowners. There was an element of class conflict: USAToday discovered that taxpayers weren’t just subsidizing first homes, but that at least 370,000 second homes were receiving heavy subsidies for flood insurance premiums. Taxpayers in less flood-prone areas were left scratching their heads why they were paying into a program that benefited them so little, while some properties were generating repeated claims and never had a premium increase. At least one property USAToday identified had flooded 34 times in 32 years, generating $600,000 in claims for a house that barely worth 10 percent of that figure – and had never had insurance revoked, never been condemned, and never had a premium increase.
Coastal dwellers and other flood-plain property owners complained to their Congressional representatives. They warned of an impending collapse in property values in coastal areas as new purchasers were forced to price in the effects of higher flood insurance premiums. They also warned that many of these individuals simply could not afford it. They threatened to cancel their policies in violation of the terms of their mortgages, forcing banks to either look the other way – and accept the risk themselves – or foreclose. Homeowners who couldn’t sell their properties and couldn’t keep up with the mortgage and flood insurance premiums after the hikes threatened they would be forced to simply walk away from their properties – sparking a replay of the ‘jingle mail’ practice of strategic default that became dangerously common in 2008-2010, during the mortgage crisis. The potential fallout among the most affected areas threatened to overwhelm the actuarial dispute over funding flood risks, with tens of thousands of construction jobs and other indirect economic costs on the line, not directly reflected in flood insurance projections.
Naturally, this prospect spooked lenders. The combined lobbies of the mortgage industry and the real estate industry, combined with strong congressional representation in heavily-populated coastal areas caused the federal government to flinch. The President finally signed a new law, the Homeowners Flood Insurance Affordability Act of 2014, repealing or delaying many of the premium rate hikes called for in the Biggert-Waters Act – and even refunded money to property owners who had already paid the higher premiums into the fund.
The new law doesn’t do anything to shore up the National Flood Insurance Program, either. Actually, the Congressional Budget Office estimates that the new law will cause a net $2.1 billion decrease in income to the National Flood Insurance Program over the next ten years.
So current homeowners in flood-prone areas won a short-term victory. But taxpayers are rapidly growing weary of providing subsidies to wealthy beachfront property owners. Yes, the situation is far more complicated than that, but such are the optics on the surface, and optics count with voters. The new law kicks the can down the road and delays an inevitable reckoning. If you have any questions about Flood Insurance, please call ACBI at 203-259-7580 or visit our website.