In its monthly e-magazine
Foreclosure Report RealtyTrac takes a
look at the current and potential impact of legislation designed to rescue the
nation's flood insurance program. Within
that legislation RealtyTrac says there may be looming another demonstration of
the theory of unintended consequences.
The National Flood
Insurance Program (NFIP) was created by an act of Congress in 1968 to help deal
with the escalating cost of the government's emergency response to flood
disasters. Because there was little
shared risk, i.e. persons who live outside of flood prone areas do not purchase
the insurance, private companies were either pulling out of insuring in high
risk areas or raising premiums to the point of unaffordability, leaving
government to clean up and repair damages after a disaster. The program provides a government subsidy to
keep premiums more affordable and as of April 2010 insured about 5.5 million
homes, the majority of which were in Texas and Florida.
High-cost flooding disasters such
as Hurricane Katrina drained the coffers of the program which is administered
by the Federal Emergency Management Agency (FEMA) so in July 2012 Congress
passed the Biggert-Waters Flood Insurance Reform Act to help stabilize the
program's finances. The changes required
NFIP to "raise rates to reflect true risk."
These rate changes are being
phased in and currently affect only homeowners who purchased their first flood
insurance after July 6, 2013 with full-risk rates starting on October 1,
2013. Virtually all lenders have long required
mortgaged homeowners who reside in a flood plain to carry the insurance so it
is primarily new homeowners and those who take on a mortgage after previously
owning a home free and clear who are initially being affected by the new
rates. However flood plains are
periodically redrawn and with the increased intensity of weather in some areas,
more long-time homeowners may find themselves required to purchase coverage.
RealtyTrac's article Private
Industry Bridges Gap for Skyrocketing Flood Insurance, written by company
vice president Daren Blomquist, says that Biggert-Waters "intentionally exempted FEMA from providing any meaningful
disclosure to the insurance, mortgage and real estate industries - not to
mention consumers - prior to the implementation of the law earlier this year." Thus
the rate increases blindsided many of those affected by them. The article looks specifically at areas on
Florida's Gulf Coast and towns such as New Port Richey, in Pinellas County,
interviewing homebuyers, lenders, and real estate agents.
One new homeowner,
George McLaughlin, purchased a future retirement home in Port Richey in 2012 and
paid a $3,300 premium for his first year of coverage. When he received his new bill for $24,300 both
he and his insurance agent assumed it was a clerical error. It was not.
Even his bank was unaware of the pending increase when they wrote the
loan. RealtyTrac says this was "certainly
a big oversight for that bank given the additional risk of default that comes
with such a dramatic increase in the cost of flood insurance."
purchased the Florida property while still employed and owning a home in
Maryland is now carrying two mortgages and facing the insurance bill due
November 2 which he still has not paid.
Thus he is technically in default on the Florida mortgage. The bank has given him 40 days (which would
have taken him into early December) to provide proof of coverage and have told
him that forced placed insurance will cost as much as $60,000.
Blomquist says the
skyrocketing flood insurance premiums "have shocked the entire real estate
ecosystem in and around New Port Richey."
He quotes local real estate agent Colleen Monagas as saying the rate
quotes started hitting in October and absolutely came as a surprise. She predicts that the new law could ultimately
lead to more foreclosures in the area as homeowners decide to walk away from
their homes rather than pay the insurance bills. At the very least she expects the law to
cause home prices to drop in high risk flood zones. She said she has already had buyers abandon plans
to purchase such houses in favor of those outside the zones, others won't even
look at houses affected by the rates.
that although many rumors are floating around about how to mitigate the impact
of the Biggert-Waters legislation, the short term impact of the law is to
hobble the nascent recovery in her local housing market, which she said hit
bottom around July 2012 and really heated up in the spring of 2013. 'This spring we were chasing houses,' she
said. 'I had buyers if you weren't there in two or three days it was already
Blomquist calls Pinellas County "the epicenter" of the Biggert-Waters
impact but says other areas are affected as well. He cites the popular retirement city of Hilton
Head, South Carolina which he says has never experienced a hurricane or flood
in recorded history, as well as coastal areas of Louisiana and Texas.
Of course the counterparties to buyers who don't wish to buy in an area
are the sellers who won't be able to sell.
Hilton Head real estate broker Frank Moriarty said, "People
who have been here a long time...and need to move on, that house is no longer
your safety net." He predicted that
values could decrease on the roughly 30 percent of Hilton Head homes located
below the 14-foot elevation requirement needed to avoid high cost insurance and
cautioned that the biggest issue could be a fear of rules changing again and pushing
more homes into that category. "'Some
people are saying it might not even be 14 feet, it might be 16 feet or something
like that,' he said." That would be devastating he points out, as that would
include 70 percent of the properties on the island.
insurance agent Jake Holehouse told RealtyTrac that the elimination of an
entitlement program like subsidized flood insurance represents a broken promise
by the federal government which said, it would back these risks if the cities enforced
the flood zone requirements. Holehouse was referring to the 1968 implementation
of the NFIP that grandfathered in flood insurance for homes built prior to Jan.
1, 1975. "'But now 45 years later they are going back on that'," he said.
But there may be
hope. Holehouse points to the venerable
underwriter Lloyd's of London which has written flood insurance for 320 years. Previously it could not compete with FEMA's rates
but now, Holehouse says, "'Lloyd's rates look really good." His
company has been working with Lloyds to come up with flat rate coverage and can
offer insurance in Pinellas's highest risk areas for $4,000 where he has seen
FEMA quotes as high as $60,000.
Lloyds is still reviewing
premiums on a case-by-case basis in an attempt to avoid what Holehouse called
the "rampant fraud" he believes was the downfall of the FEMA program. Lloyd's, he said, is being careful but are
also hungry and want to underwrite a lot of flood.
If Lloyd's leads,
other companies will undoubtedly follow and they could find an expanding
market. With areas such as Boulder,
Colorado experiencing first-time severe flooding, lenders may look at requiring
the insurance in locations outside of traditional flood plains. Cautious homeowners may also be receptive to
subscribing to flood insurance if they can do so at a cost that accurately
reflects their risk histories. This
increase in the pool would also help to lower premiums for higher-risk