The River is Rising

The title of today's blog comes from a song by Michael W. Smith. Many of the residents of Tennessee have been affected by the recent floods, including many artists in the music industry who store their equipment in Nashville.

Flooding can be a problem anywhere in the country. In 2006, El Paso, Texas received 18 inches of rain in one year. While that does not seem like much to most Americans, for us it was catastrophic. In the desert, we do not have much natural ground cover so heavy rains produce flash flooding which washes out streets, homes and businesses. It is expensive and difficult to recover from. In our case, it is also rare. Our weathercasters named it the 100 year flood, because they don't expect us to see it again for a while.

Ironically, many of the people who experienced problems in El Paso during the 2006 floods were not in recognized flood zones. Our flood zones are in low lying areas, and areas by the river, but most of the people who were really affected lived on the mountain and in higher elevations where rising river water was not an issue. They were the victims of heavy flow off the mountain that threatened what they owned.

Disasters like ours, and the heavy flooding in Tennessee which has been expensive and devastating to many Americans make us especially concerned when we hear that the National Flood Insurance Program has been defunded twice since January 1. According to government, the program insures 5,500,000 Americans, but it is heavily indebted and without Congressional authorization to fund this program, it cannot continue. The program initially expired September 28, 2009, and it received an extension up until February 28. No re-extension was signed until March 3, and then that extension expired at the end of March. The program was defunded for the first 18 days of April, and then it was extended through the end of May, 2010.

While most would agree that the National Flood Insurance program is necessary, it's refunding is tied to other political footballs. The most recent extension was tied to the same bill extending unemployment benefits, and since that bill was a political hot button, the flood insurance program languished for days. Congress estimates that the lapse in funding for the flood insurance program prevented close to 1400 homebuyers from closing on home purchases per day, since no home purchases in flood zones could be closed without a flood policy in force, and no flood insurance policy could be in force while the program had no funding. (Although the press secretary for FEMA assures us that all existing policies remained in force and service was uninterrupted.)

Enter Barney Frank and Maxine Waters who have plan to fix this problem. Maxine Waters, (D-CA) has introduced HR 5114--the Flood Insurance Reform Priorities Act. On May 10, Barney Frank (D MA) introduced his own smaller companion piece of legislation, HR 5255, the Stable Flood Insurance Authorization Act of 2010.

Unlike so many bills floating through Congress these days, these two bills are short and to the point. FEMA has remapped much of the US to expand the flood maps to include more areas and properties. HR 5114 (Water's bill) extends the NFIP's funding through September of 2015, and it contains new provisions for mandatory flood insurance for areas that have previously not been flood zones. It raises the flood insurance limits from $250,000 to $335,000, and it contains a provision for raising premiums on homeowners currently living in flood zones and carrying flood insurance by 20% per year (The current rate of premium increase is capped at 10% per year).

HR 5114 calls for a 5 year phase in of flood insurance rates for homeowners in newly mapped areas. Anyone living in a home that is now in a flood zone but was not previously will be subject to a scale as follows:

1. For the first year of the five year period, 20% of the chargeable risk premium rate
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2. For the second year of the five year period, 40% of the chargeable risk premium.

3. For the third year, 60% of the premium

4. For the fourth year 80%.

5. During the fifth year, the premium becomes 100%.

The new law requires FEMA to notify homeowners in newly mapped zones that they live in a flood zone, where its boundaries are, and generally what other similar homeowners in similar areas pay for flood insurance.

Barney Frank's companion bill gives the director of the FEMA the authority to set premium rates by notice and sets a three year delay in the effective mandatory purchase requirement for new flood areas as designated in flood insurance maps on or after September 2008. In other words, if you have been living in your house for 25 years and never had a drop of water in it, you may be getting a mandatory insurance notice next year that you have to purchase flood insurance on the scale just described above.

Interestingly, HR 5114 acknowledges at the beginning that NFIP has struggled financially, by stating in paragraph 3, of Section 2, that "Several years of below average flood claims losses and increased voluntary participation in the National Flood Insurance Program have allowed the program to fully service the debt incurred following Hurricanes Katrina and Rita and allowed the program to pay $598,000,000 of the principal of that outstanding debt." (Notice that the bill states how much they paid back, but not the amount of the outstanding debt.) Water's bill creates a $50,000,000 grant for outreach to property owners and renters. The uses of this grant include identifying the owners of residential and commercial properties in communities that participate in the national flood insurance program, educating owners and renters as to the risks of flooding and the continued flood risks to areas that are no longer subject to the flood insurance mandatory purchase requirements, and encouraging such owners and renters to maintain or purchase flood policies.

Remember that the language of HR 5114 states specifically that the National Flood Insurance Program has been able to pay back part of its debt through increased voluntary participation. Considering that we know that one important key to insurance is spreading risk among the largest pool possible, isn't it likely that mapping properties that have never been in flood zones before and spending the $50,000,000 in grants to encourage homeowners to buy insurance is just a way of spreading the risk NFIP and further increasing revenues? By letting the funding lapse, Congress has incentivized the insurance and mortgage industries to welcome the 5 year extension to NFIP without questioning the contents of the bills or the ultimate costs in premiums to homeowners and business owners who are going to be helping to pay back the rest of NFIP's debt.