How Flood Insurance Changes Can Cost You

Last year Congress passed the Biggert Waters Flood Insurance Reform Act of 2012 designed to make up for the federal government’s financial losses, including from Hurricanes Sandy and Katrina. The problem is this may wreak havoc on home values. 

What exactly is the Biggert Waters Act? 

The federal government is behind all flood insurance. It covers 5.6 million homes in 20,000 communities. Biggert Waters was passed because the flood program was operating at a loss.  The Flood program was set to end in 2012. Congress agreed to extend it for five years but because of the wrestling in DC over a balanced budget the compromise changes the National Flood Insurance Program. You see, for years the federal flood insurance program has been charging premiums that are far below what should be charged in order to reflect actual flood risks and losses. For example, some homeowners have been paying only about 35% of what they should and don’t even know it. That’s because the federal government has been subsidizing the difference. So at this point the flood program owes the US Treasury about $25 billion.

Annual flood insurance premiums only bring in about $3.6 billion a year. They need to be collecting at least another $1.5 billion a year. 

In a nutshell congress said to the Federal Emergency Management Agency (FEMA), the agency that runs the NFIP, that they need to make the flood insurance program pay for itself. Biggert Water lays out a plan to do that  (Judy Biggert ®  Ill and  Maxine Waters (D) Ca).

And what is that plan? 

The Act has many sections, but in a nutshell, it ends 2 subsidies (i) for properties built before the first flood map 12/31/74 – rates will go up 20% a year for 5 years. That’s over 628K homes in Florida alone. (ii) Starting in 2014 if the new flood maps show you’re now in a higher risk zone your grandfather status goes away also at the rate of 20% a year for 5 years. This will have a bigger impact in areas like NY NJ and LA. Owners of business properties and properties that have had severe or repetitive losses (over FMV) will pay 25% more each year until their premium fully covers the risk. New owners who bought after the Act passed in July 2013 and folks who let their policy lapse will pay the full premium now. Second homeowners will see the biggest impact right away. The Act also removes a grandfather provision: historically owners were allowed to keep their insurance bill tied to the flood map that was in use when their home was built. Reforms remove this grandfather clause and link premium costs to the new elevation maps. Some of the homes aren't even near water but are in low lying inland areas. 5% from some of these policies will now also go to build a FEMA reserve fund.

This will affect 20% of the 5.5 million flood policy holders or about 1.1 million homes. More than 2 million of these homes are right here in Florida. About 270,000 will see immediate increases.     

What can someone who find his insurance is about to increase do? 

Only folks who pay cash and decide to forgo insurance will escape. Another option if possible would be to raise the level of the home to decrease the risk premium. Buyers should certainly ask what future premiums will look like and Realtors and other professionals should do their best to disclose all of this in writing but therein lies the real problem. Most folks can’t afford that and are being caught by surprise. Some will find the higher premiums unaffordable and may need to sell their homes and the real issue is whether buyers will be interested in homes in flood zones knowing how much higher the costs of owning these homes will be? And if so will their purchase offers be less to compensate for the now higher costs of insurance? A lot of these homes are not even water front; they’re just in low lying inland areas. Compounding that is the fact that the Flood Insurance Maps and some homes that had not been in a flood zone before now are or are shown as being in a more risk area. FEMA begins with the “base flood elevation” which is the level at which the annual chance of flooding is 1% or more, aka the 100 year flood level. Other than were in a low risk flood zone may now be in a higher risk flood zone. Realtors are already reporting fewer showings of affected homes. Even if your particular home is not in a flood zone but others in your area are, lower sales prices could impact the value of your home.  

Biggert Waters also mandated an affordability study, but didn’t say it had to be finished before the premiums went up. So Congress needs to intervene. Proposals are in the works to delay increases until after the affordability studies also called for by Biggert Waters are completed – they’re now over due. Governor Scott, Senator Nelson and politicians from Florida and other state are working to delay the rates hikes, many of which went into effect October 1, but those efforts were delayed by obamacare and the shut down.  Now that those issues are over, we may see the implementation of these new rates purchased back for a few years. 

For example, after the 2004 – 2005 storms the state of Florida allowed Citizens wind insurance to increases but capped that at 10% a year and treated new buyers the same way.

 

Shari Olefson's picture
Shari Olefson

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