A new federal law that is intended to overhaul the nation’s flood insurance system could have devastating effects on homeowners, homebuilders and others in the housing industry in coastal and flood-risk areas. President Obama signed the Biggert-Waters Flood Insurance Reform Act into law in July of 2012, and it is being phased in over time. Much of the nation is not even aware of this legislation and its potential impact on American consumers and the housing markets, but the changes have many homeowners, homebuilders, real estate agents and government officials in coastal and flood-prone states scrambling.
The Biggert-Waters Act seeks to help stabilize the National Flood Insurance Program, which is about $25 billion in debt. The new law directly impacts the finances of effected consumers because it eliminates flood insurance subsidies to homeowners, along with grandfathering, which allowed homeowners to keep current rates as long as their homes were built in accordance with previously established flood protection standards. In addition, in connection with the implementation of the law FEMA has proposed new flood maps and will use standards that are expected to result in broader-reaching flood zones for many coastal and flood-prone areas.
New Flood Insurance Standards Could Have Devastating Effects
The law is causing panic for many residents that fear they will not be able to afford the high insurance premiums. FEMA’s flood map changes mean expanded flood zones, which will cause hundreds of thousands of homeowners who never needed flood insurance to now be affected. These homeowners who are new to flood insurance cannot avoid the issue, especially because it will have to be addressed when selling or when working with lenders (many newly affected homeowners will learn that their existing lenders will proactively require them to obtain flood insurance). For homeowners who already had flood insurance, the subsidy and grandfathering changes mean their ultimate rates could skyrocket over what they have traditionally paid. Some coastal residents in Louisiana have complained that the new law would increase their premiums from about $1,000 to as high as $20,000 or more per year. The Boston Globe reported that because of this new law and the proposed FEMA map changes, one waterfront condominium could quickly see flood insurance rates rise from $4,300 per year to $45,000.
Public officials, real estate agents, homebuilders and others are worried about the ripple effect that this flood insurance change could cause, devastating the housing markets in these coastal areas. Home values could plummet as people are unable to pay both their flood insurance premiums and a mortgage. This could cause a massive number of foreclosures. Banks would be stuck with bad loans as people lose jobs, and the local governments would lose out on millions in tax revenue. Sales of new homes and existing homes would be affected, and the flood insurance cost increases could keep homeownership well out of reach for many across these regions. In addition, the value of vacant flood zone land that is being considered for development will decrease too, because of the law’s likely effect on the value of finished homes that could be built there. Real estate agents are reporting that deals already are falling apart because of the uncertainty and potential costs related to this law.
The actual rate increases and their scheduled rollouts have left many confused as to what they will actually be paying. Adding to the confusion is the fact the FEMA has not yet completed the new flood maps. At this point the maps are expected to be complete by the beginning of 2015 and this is also when the rate increases will begin. Homeowners rates will increase in a stepped manner over time, but owners can expect to pay 20% more per year until their entire premium amount is reached. Homes built after the new maps have been established will be required to immediately pay the full flood insurance premium. FEMA has a website – www.FloodSmart.gov – that provides some information for consumers about the effects of the new law. On the government web site consumers can learn about whether they need flood insurance in the first place, find resources about obtaining coverage and get information about contacting agents to buy flood insurance policies.
More Time To Look At Flood Insurance Reform?
Under the new law, FEMA was supposed to issue an affordability study by April 2013 that would detail the effect of this law on consumers’ insurance rates, but the agency missed its deadline for this critical report. Still, Washington, DC may be listening about the issues and concerns because a new bi-partisan bill has been unveiled that would delay the implementation of the flood insurance rate increases for about 4 years. Officials from across the nation – including Florida, Georgia, Mississippi, Louisiana, New Jersey, New York, Massachusetts and North Dakota, among others – have joined together to lobby for and sponsor this legislation to delay implementation of the Biggert-Waters Act and its flood insurance changes. A key factor in the legislation is to pause the law while giving FEMA time (about 2 more years) to complete the affordability studies.
What Does This Mean For Property Owners and Those in the Real Estate Business?
Individual property owners will need to assess whether they are affected by the new flood insurance law. Many people may be in limbo for a while because of the possible delay of the law and because it will take FEMA several years to finish its new maps nationwide. Of course homeowners and landowners that remain on high ground will not be affected by this new flood insurance law, but those that can see that they are going to be affected will need to evaluate the impact of the changes on their finances and the overall affordability of their homes.
And from a housing market viewpoint, as the flood insurance law now stands entire neighborhoods or housing sub-markets could be negatively affected in cities and towns where there are many homes — or land that is intended for development for new homes — in flood-risk areas. For example, this could be seen in communities built in flood plains along rivers. It’s likely that the largest housing market impacts will be seen in coastal areas where FEMA’s new maps could put the housing market for entire cities (not just a few neighborhood sub-markets) into high flood-risk areas. Beach communities and resort towns in particular could see a dramatic effect on the vacation property market, as the new flood insurance rates could put many of these second home properties out of reach for buyers (and the current owners).
But the fact is, some type of flood insurance reform is likely to be a necessary evil. So even if there is a delay for the law, politicians, economists and many others agree that the current flood insurance system is not sustainable. However, until these major issues and questions are sorted out it will be unclear what the costs will be to consumers and there will be a great deal of uncertainty for many people living in or near flood-risk areas.