The River is Still Rising

On May 11, this blog was devoted to the lapses in coverage for the National Flood Insurance Program. NFIP's funding has to be authorized by Congress, and it has experienced several lapses this year alone, including a 20 day lapse in April. The program had been refunded through May 31, 2010, pending votes on HR 5114 by Maxine Waters (D CA) and its companion bill HR 5522 offered by Barney Frank (D. MA). These two bills would reauthorize the flood insurance program through 2015 and provide for expanding mandatory coverage for homeowners who are currently living in zones that have been remapped by FEMA as flood zones. These homeowners have not been required to pay flood insurance in the past, but they will be required to obtain this coverage going forward.

As of May 31, 2010, Congress had not reauthorized funding for NFIP, so the flood insurance program is again defunded, and no new flood insurance policies can be issued. Now 9 days into June, during the peak of the homebuying season (which is traditionally Memorial Day to Labor Day) this inability to close loans on properties which require flood insurance is certain to put a damper on summer sales. Congress estimates that for each day that NFIP remains unfunded, 1400 buyers are unable to close on their homes nationwide. I do not know whether this figure is adjusted seasonally, since certainly the real estate industry is subject to seasonal cycles, but assuming that the 1400 homes figure does not need adjustment, 12,600 buyers would have failed to close in this 9 days alone.

FEMA's website has guidance posted for dealing with the lapse of funding for NFIP, including an FAQ section. Basically, a person who had his application for flood insurance submitted and approved can be covered--anyone who did not will have to wait until Congress reauthorizes the program. The FEMA FAQs state that there is normally a thirty day waiting period for flood insurance to go into effect, but if the flood insurance is being obtained in connection with a loan, there is no waiting period. For policies that have a waiting period, if Congress funds the NFIP retroactively, the waiting period would begin May 31. Claims will be paid on existing policies during the program hiatus.

Why would Congress allow funding to lapse on such an important insurance program at just the time of year when its absence would be felt the most? Probably because rather than just tying funding to another bill, as they have the last few times that they have authorized additional funds for NFIP, Congressional leaders are hoping to secure passage of HR 5114. The Congressional Budget Office completed its cost estimate of the new bill on May 17, 2010, and the results are available on line at the CBO website.

FEMA requires flood insurance for properties located in areas which have a 1% or better chance of flooding. Under the current law, about 20% of the flood insurance policies are subsidized at about a 60% discount because the properties were constructed before the community flood insurance maps were written, or before 1975.

According to the CBO report, Congress established the National Flood Insurance Fund as the only source to play claims and other expenses associated with the National Flood insurance program. In addition to raising money through premiums, fee income, and earned interest on fund balances, the National Flood Insurance Fund has the authority to borrow from the US Treasury (up to $20.775 billion). However, because of the 2005 hurricane season, the NFIP owes $18.75 billion to the treasury as of May 2010. (This is interesting because the paragraph 3 of HR 5255 states that "several years of below average flood claim losses and increased voluntary participation in the National Flood Insurance 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 principle of that outstanding debt." That sounds impressive unless you understand that the debt repayment is less than 5% of debt itself.)

HR 5114 will authorize the National Flood Insurance program for an additional 5 years, so upon passage there should be no more lapses in funding until 2015. As of January of 2010, NFIP had 5.6 million policies in force and receives about $3.2 billion in premiums. HR 5114 will bring some extra funds into the coffers by doing the following:

Increasing premiums for policyholders who are currently paying discounted premiums; gradually implementing and increasing premiums for homeowners who are in recently remapped flood zones; increasing the deductible for some policyholders; increasing the limit of average annual premium growth; increasing the maximum coverages for structures and contents and introducing new lines of coverage. The bill will also increase civil penalties from the current rate of $350 to 2000 per violation for lenders who do not enforce NFIP purchase and notification requirements for mortgagors and will increase the maximum penalties which can be levied against a financial institution in one year from $100,000 to $1,000,000, with no limit for any institution fined at the maximum level for three out of the previous five years. These fines and penalites alone are estimated to bring in an additional $1,000,000 per year.

By increasing deductibles, the CBO estimates that the bill will reduce claims by less than 5%. By raising premiums, the CBO estimates that the bill will increase income by $2.8 billion from 2011-2020, and if the increased premiums cause some policy holders who are currently having their premiums subsidized to let their policies lapse, the CBO estimates that this will result in a net savings to program costs of $50 million a year over the next 10 years. That $50 million a year being saved because homeowners dropped their policies can in turn be used to pay for the outreach program that FEMA will be starting to "encourage and facilitate the purchase of flood insurance coverage by property owners and renters and to increase public awareness of flood risk retention." This new outreach program will cost an estimated $222 million over the 2011-2015 period.

NFIP is going to incur some other new expenses in addition. HR 5114 authorizes $476 million dollars between 2011 and 2015 for mitigation and outreach and to establish the Office of the Flood Insurance Advocate, which will operate at an estimated cost of $23 million over the next five years. Why does every new federal bill create and fund another government agency? HR 5114 would authorize FEMA to undertake studies and issue reports on the national flood insurance program which are estimated to cost about $1 million in 2011. FEMA will have up to $40 million a year to extend its Severe Repetitive Loss Mitigation Pilot Program to provide grants for up to 75% (in some cases 90%) of the cost of projects to reduce flooding to areas that have flooded at least four times in history or received two payments that exceed the market value of the structure.

Finally, HR 5114 will create another mandatory disclosure. The bill will require mortgage originators to include specific information about the availability of flood insurance on each good faith estimate. (That way the borrower can see how much flood insurance would cost, whether they are required to have it or not.)

Overall, the CBO estimates the changes in HR 5114 will increase net income to the National Flood Insurance Program by $3.2 billion over the next ten years, but they also estimate that these funds will be spent on claims, so while the NFIP will look a little better financially than it does today, it apparently still will not have the money to pay back all of the $18 billion dollars in loans still owed to the U.S. Treasury.