Congress had a lot of unfinished business to deal with this month, but no issue may be more important to more homeowners than reauthorizing the National Flood Insurance Program.
That’s because floods can occur anywhere. In fact, a third of all claims paid by the program are on policies in communities considered minimal-risk locations.
Your home has a 26 percent chance of being damaged by a flood in the course of a 30-year mortgage.
In other words, your home has three times the chance of being ravaged by water than by a fire, which has a 9 percent probability over the life of a typical mortgage.
If that doesn’t get your attention, how about this: Like the homes the program was designed to protect, the flood insurance program is under water. While claims were not as great in 2006 and 2007 as they were in 2005, Hurricane Katrina and other major storms have put the program in the hole to Uncle Sam for more than $17.5 billion.
After the 2004/2005 hurricane season, the insurance program paid $2 billion or so in claims. But in 2005, it paid more than $16.5 billion. That’s roughly half of what it has paid in claims and related costs since 1978. Funding for the program expires Sept. 30, at the end of the government’s fiscal year. Congress has always reauthorized it. Until Congress created the insurance program in 1968, most property owners were unable to obtain flood coverage from private firms, which still won’t assume the financial risk on their own.
Since the debt the program owes the U.S. Treasury is too great to be repaid solely through premiums, lawmakers are likely to forgive it when they get around to funding NFIP again this year. But they probably will require significant changes that would put the program back on sound financial footing.
“Somewhere between now and Sept. 30, we are going to have a flood bill,” says Mark Washko, a member of the National Association of Realtors’ policy staff. The only question is in what form?
In September, the House passed legislation to extend the flood-insurance program for five years, through fiscal 2013.
But in doing so, lawmakers voted to phase out subsidized rates on commercial properties, vacation homes and second homes built before 1974.
The bill also would impose full-risk premiums on structures that have suffered more than two insured flood losses and on which their owners have refused reasonable offers of funding from the Federal Emergency Management Agency to mitigate damage.
These so-called repetitive-loss properties are older residences grandfathered into the program when it was created. According to FEMA, they account for a disproportionate share of paid claims.
In late October, the House Committee of Financial Services approved another bill that would eliminate subsidized rates on single-family properties used as principal residences and are sold for $600,000 or more after enactment.
The bill would not affect property owners paying subsidized rates on their main homes. But those buying their primary residences after the bill becomes law and paying $600,000 or more would see insurance rates increase 15 percent a year, starting in 2011, until their premiums reach the full actuarial rate. (That’s the same schedule lawmakers adopted for increasing the rates on commercial and vacation properties and second homes.)
The full House hasn’t considered the second measure yet. But it is expected to pass and be joined with the first bill, which also includes a highly controversial provision that would allow homeowners eligible for flood insurance to purchase coverage for wind damage.
That amendment is intended to address the problem owners run into when insurers maintain that damage was caused by wind rather than water.
Also on the agenda: Another bill cleared by the financial-services panel that would provide a federal backstop for state-sponsored insurance programs. Specifically, it would create a National Catastrophe Risk Consortium that would allow the federal government to make loans to qualified state insurance funds that run short of money.
Called the Homeowners Defense Act, the measure is designed to improve access to more affordable property insurance, especially in disaster-prone areas, where obtaining adequate coverage has been problematic and expensive.
The Senate Banking Committee last fall cleared its own version of legislation to extend the NFIP for five more years.
———-
Write to Lew Sichelman c/o Chicago Tribune, Real Estate, 435 N. Michigan Ave., 4th floor, Chicago IL 60611. Or e-mail him at realestate @tribune.com. Sorry, he cannot make personal replies. Answers will be supplied only through the newspaper.
