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A government shutdown could halt flood insurance, delaying thousands of home closings

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By Monica Godnick

Congress keeps hitting dead ends in attempts to extend a long-term plan for the federal program that provides flooding coverage for homeowners in the country. Unless the National Flood Insurance Program’s renewal happens by its new deadline of Feb. 2, it could lapse.

That could mean that about 1,300 closings on home sales per day would be delayed or canceled, according to the National Association of Realtors.

The flood insurance program’s Feb. 2 deadline is in the latest stopgap spending measure passed by the Congress and signed by President Joe Biden on Nov. 16. Unless the deeply divided Congress passes another spending bill for the government early this year, portions of the federal government — including the flood insurance program — would shut down.

“Reauthorizing NFIP ensures that home sales will continue to move forward with the full protection of flood insurance,” Austin Perez, a senior policy representative for the National Association of Realtors, told Capital News Service. “It’s about protecting people, property and communities from flooding, the number one natural disaster in the United States.”

Even though the federal program is not funded by the government, Congress has to reauthorize the Federal Emergency Management Agency (FEMA) to keep writing flood insurance policies.

The NFIP is funded by premiums and fees that policyholders pay. FEMA in April completed a two-year, phased-in change in rates for flood insurance policy holders.  Lawmakers have been clashing over whether the new pricing of premiums across states should reflect the level of risk of every area or if premiums should help subsidize the communities that increasingly are more vulnerable to flooding.

“It’s one of the most important programs for the entire real estate industry,” said Lake Coulson,  the chief lobbyist of the National Association of Home Builders. “Arguably (it’s) the most important insurance program that’s out there.”
 
FEMA’s previously announced pricing makeover for the flood insurance program, known as Risk Rating 2.0, was designed to establish the rates based on the “actuarial” risk of a particular area. In other words, the prices are intended to more accurately reflect how prone a house is to flooding based on its location.

FEMA’s move addressed sweeping annual losses and debt in the flood insurance program.

The NFIP historically has been allowed to borrow money from the Treasury Department to pay claims and later repay the government with interest, according to a report by the Congressional Research Service.

“However, this changed when Congress increased the level of NFIP borrowing to $20.775 billion to pay claims in the aftermath of the 2005 hurricane season (particularly Hurricanes Katrina, Rita, and Wilma),” CRS said. “Congress increased the borrowing limit again following Hurricane Sandy to its current limit of $30.425 billion.”

Under the new model, policyholders in lower-risk areas would stop subsidizing the people in higher-risk regions.

“I think flood insurance provided by the taxpayer, subsidized by the taxpayer, shouldn’t be for rich people and shouldn’t be for their vacation home and beach homes,” Sen. Rand Paul (R-Kentucky) said during a September debate on the Senate floor over the flood insurance program.

“We’re being asked, though, to extend the flood program without any reforms, without any reforms to protect the taxpayers,” he said after describing the NFIP as well-intentioned.

“The homes in Louisiana that need flood insurance are not mansions,” Sen. John Kennedy (R-Louisiana) responded. “These are homes of working people. These are modest homes being paid for by people who get up every day, go to work, obey the law, pay their taxes, and try to do the right thing by their kids.”

The government’s pricing changes mean some homeowners will see a drastic rise in their flood insurance premiums, while others will see smaller increases; some homeowners actually could see premiums drop.

Gregory Baecher, a civil and environmental engineering professor at the University of Maryland who worked on reconstruction plans in New Orleans after Hurricane Katrina, used his house in Cape Cod, Massachusetts, as an example of how much higher the new rates are.

“My current flood insurance is like $1,000 a year so, so doubling means $2,000 a year. I mean a lot of people (in) the country can’t afford that,” he said.

The program has a rate increase limit of 18% a year. Therefore, it won’t be until 2037 when 95% of current policies will be charged the full rate, according to projections by the Government Accountability Office.

“Today, we always think of, you know, the billionaires who live on the coast of the barrier islands but in fact, the people most at risk are poor people both white and Black,” Baecher said. “(People) who live in Appalachia and then in the coastal Piedmont. (People) who are subjected to riverine and coastal flooding — principally riverine flooding. And so the idea of NFIP was to protect those people.”

A dozen states have projected rates that will more than double, according to a study by First Street Foundation. High-risk coastal states like Florida, Louisiana and Mississippi are among them –– and inland states like Kentucky, South Dakota and West Virginia make the list, too.

“The consequences of the increases in premiums can be seen directly in the decrease in policies in force, which have fallen from a high of 5.7 million policies in 2009 to 4.7 million as of July 2023,”  the report stated.

FEMA spokesperson Jeremy Edwards said “there are many factors that could influence this drop in policyholders, including the economic impact of the pandemic, inflation, the housing market, affordability or purchasing flood insurance from the private market.”

Ten states –– among them Louisiana, Florida and Virginia –– have sued FEMA to block the overhaul.

“While the agency (FEMA) paints a picture of nuanced calculations using massive data repositories that reveal a property’s individualized risks, the reality is much simpler: Flood insurance is going to be much more expensive for pretty much everybody,” the lawsuit said.

In a motion to deny the request for a preliminary injunction, Justice Department attorneys wrote that the new pricing model “updates the NFIP (National Flood Insurance Program) with up-to-date actuarial methods at a time when the program sorely needs reform.”

“For the past several decades, the NFIP has been losing billions of dollars because premiums have not accurately reflected flood risk,” the government argued. “Under the legacy (previous) rating approach, taxpayers and policyholders in landlocked states were covering the cost of flood risk in a few coastal states. Risk Rating 2.0 charges every policyholder their fair share based on their property’s true flood risk.”

And before the Congress reauthorizes FEMA to write flood insurance through NFIP, lawmakers need to agree on whether to go along with FEMA’s long-term pricing of premiums or to change the plan in some way.

“I think you know, sort of one extreme says, we should just make this all actuarially based, make the people who are at risk pay the full risk exposure. And I certainly I think that’s a perfectly rational argument,” Baecher said.

“The other argument,” he continued, “is forget how we got here. We’re in this situation now. And we got people who can’t afford to pay for the insurance…What are we going to do about it? Are we just going to force them to go without (it)? And then get totally crushed when (a)I  flood comes? Or are we going to try to be compassionate and help them?”

“To call (the NFIP) imperfect is an understatement,” Kennedy said. “But the only thing worse than having what we have right now is to not have a National Flood Insurance Program at all.”

If the government shuts down, NFIP would only have $2.4 billion left for insurance claims.

“After that no claims will be paid out,” Burchman Insurance Capital, an insurance brokerage firm, stated via LinkedIn.

A government shutdown that lasts long enough to drain the reserves left in the flood insurance program would put many new homebuyers required to hold flood insurance in difficult situations.

“You live in Louisiana. You live in Florida. You live in Mississippi, (you need flood insurance),” the home builders’ Coulson said. “But not exclusively, because you could be in Oklahoma, and be on a riverbed that floods after a storm and you need flood insurance.”

“The expenses that are associated with flood are such that (private insurance companies) would not be able to survive,” he added. “And they can’t provide it to the homeowner in an affordable way. So the government steps in.”

Property owners can purchase flood insurance through a private company as long as the coverage is as broad as the national flood insurance program’s, according to CRS.

“NFIP continues to be the largest provider of flood insurance covering about 5 million policyholders across the country,” Perez said. “But there is also a large and growing private market for flood insurance which is often more affordable than NFIP in many parts of the country.”

Within Maryland, places like the Eastern Shore are at risk. And the whole perimeter of the Chesapeake is vulnerable as it’s experiencing both geological subsiding –– or land sinking –– and rising sea levels, Baecher said.

About 244,992 properties in Maryland have over a 26% chance of being severely impacted by flooding in the next 30 years, according to the online tool Risk Factor.
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“Natural hazards risks are just going to get bigger and bigger and bigger over the coming decades,” Baecher said.  “And we as a federal government, have really got to figure out some compassionate way of dealing with the natural hazard risks.”

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A government shutdown could halt flood insurance, delaying thousands of home closings