Lately, most news involving the recovery of the housing market in the United States has been overwhelmingly positive. However, there is one issue that poses a dangerous threat to the recovery in housing: flood insurance.
A new set of laws is not only jacking up the rates on homes that already had flood coverage, it is placing homes in flood zones that historically have not been, especially in the New York and New Jersey areas.
The Biggert-Waters act
The Biggert-Waters Flood Insurance Reform Act of 2012 was intended to help make the National Flood Insurance Program (NFIP) more self-sufficient. One of the keys of the legislation is to raise flood insurance rates to reflect the actual (not subsidized) market risk involved with insuring flood-prone properties. The increases are to happen gradually for those homeowners who already received the subsidized rates, but those who bought after June 2012 get hit with the entire increase all at once.
In theory, this is a good thing. The NFIP has been running at a deficit for some time now, and the claims paid out to victims of Hurricane Sandy were especially hard on the program's balance sheet. So, getting the NFIP back onto solid financial footing is a good thing, right?
Unfortunately, the act has had several unintended consequences, ones that are causing severe pain for homeowners all over the country. Flood insurance rates have risen to unobtainable levels for recently purchased homes, and some homeowners who never were designated as being in a high-risk flood zone are receiving enormous bills.
In one of the more extreme cases, a homeowner in Big Pine Key, Fla., saw his flood insurance premium soar from $1,989 annually to $49,252 under the new rates. Homeowners who were formerly not in high-risk areas are seeing annual rates rise from $300 to over $8,000 in some cases. While these are extreme examples, it's not uncommon for a policy in a designated flood zone to triple, or even quadruple.
What it could mean for real estate
These "reforms," which took effect in October, have caused many coastal real estate markets to grind to a halt, rendering some homes virtually worthless. Flood insurance is a requirement to get a mortgage in flood zones, and an $8,000 flood policy on a $250,000 house can raise the total monthly mortgage payment by more than 50%, making these homes much less appealing to prospective buyers. In many cases, houses are going under contract, only to see the deals fall apart once the buyer receives his or her insurance quote.
If something is not done, this could have devastating consequences on many of the nation's housing markets, not just those that are traditionally thought of as flood zones. The largest share of the NFIP's policies, roughly 37%, is written in Florida, which was one of the hardest-hit markets by the mortgage crisis and is experiencing a robust, but extremely delicate, recovery. Any coastal area or any home across the country near a lake or river is a potential target for one of these ridiculous rate hikes.
Is a fix on the way?
Fortunately, there are many people on both sides of the political spectrum who recognize this as a major problem and are committed to finding a solution. In fact, Maxine Waters, one of the co-sponsors of the original legislation that bears her name is among those leading the charge to pass the proposed Flood Insurance Affordability Act currently awaiting a vote in Congress.
Among other provisions, the act would delay the rate increases on primary homes and small businesses for four years and mandate the completion of an affordability study before any new rates could be implemented. The new legislation does face an uphill battle, particularly in the House of Representatives, where some Congressmen on the far right are strongly opposed to delaying the increases.
While Congress may eventually figure out a solution, it may be too late to help some homeowners who are being forced to pay exorbitant rates to keep their flood insurance. If the government does not want to see the last several years of recovery in our real estate markets disappear, it is imperative that action is taken in the very near future.