If you don’t know yet that Biggert-Waters has completely changed the rules regarding the sale of properties in the flood plain, you are either in the desert (lucky you) or oblivious. Some basics: Congress wanted to fix the $24 billion hole in left in the NFIP (National Flood Insurance Program) after Katrina. To that end, they decided to pass the Biggert-Waters bill to make the NFIP solvent, and flood insurance to be “actuarially sound”, as well as building up a reserve for future floods by having policy owners contribute 1% a year to creating and building a reserve. This all sounds fiscally sound and great on paper. In reality, it is a bigger mess than Katrina ever was!
First of all, FEMA was to have completed an “affordability study” before implementing Biggert- Waters. However, such an insufficient time was given to accomplish this, that FEMA didn’t do it. On October 1, 2013, the new law went into effect. Existing property owners who have properties in the flood plain immediately found out their premiums would rise 25% a year “until the program is actuarially sound” (which is some time in the future which no one seems to be able to predict). New policy holders would have to pay much steeper premiums. How steep? Well, in my market, which is North Central Pennsylvania, we are seeing premiums as high as $12,000 or even $15,000 per year—on houses selling for $100,000, give or take. My local geography is river valleys—so many small towns, like mine have flooded. Our last major flood was in 1972. Since then, our residents have dutifully paid flood insurance each year, but not submitted any claims. In my small community, about half the parcels in our borough are in the flood plain—so this is devastating for our local real estate market.
It’s pretty evident Congress didn’t do the math on their bill, and can’t do the math on affordability. Here are two examples: The deficit is $24 billion (by the way that was before Sandy, which was when the bill was passed). The number of households paying flood insurance in the United States is 5.6 million. That means that before they even cover ongoing insurance costs, or contribute the 1% a year to the reserve, each policy holder would have to pay almost $4300. In my community, our lower cost houses in the flood plain have traditionally had flood insurance premiums of $800 to $1200 a year. So, Congress couldn’t do that math, nor (apparently) can they do this math: If a flood insurance policy costs $12,000 a year, that’s a $1000 a month. At current rates (4.75%) and terms (30 years), that “buys” a mortgage amount of $191,700. Put simply enough so even elected officials can get it: If our buyers had another $1000 a month to put toward PITI, they’d be able to buy out of the flood plain!
There’s now a movement afoot to “postpone” the immediate implementation of Biggert Waters. Oh great, let’s just kick another can down the road! We need to fix this, and not just delay it. Some questions to contemplate:
• Why, with so many federal programs running at a deficit, did Congress decide this one had to become solvent—in just one year?
• Why, if making it solvent, were they planning on relying just on the 5.6 million current policyholders? Many people who received NFIP payouts in the past are no longer policy holders.
• Why doesn’t Congress see that putting all the flood properties in the same pool guarantees that the pool will be drained (eventually) because everyone in the flood plain eventually floods (in fact, during Sandy, people who had never flooded before experienced flooding)
• Why not fund all natural disasters with a very small percentage on all homeowner premiums—like .5% or 1% of the policy amount per year—to cover any and all natural disasters: floods, forest fires, earthquakes, tornadoes, mudslides, hurricanes, etc. ?
Other issues that are muddying the waters include the claim by FEMA is that those who don’t carry insurance will not be covered in the event of another flooding disaster. Color me cynical, but show me a politician who will stand in front of a picture of wiped out houses and distraught people and say: “Sorry, no money for you guys—you didn’t have insurance” and I’ll show you a politician who is ending his career!
Some political groups are saying this is “welfare for the rich” and only benefits the “1% who own beach front mansions”. A Wall Street Journal Editorial said that, and I wrote them a letter, which they did publish—explaining that people who buy $100,000 houses are not in the 1%!
Here’s where I see this going, if it is not corrected:
• Sales in the flood plain in places like my hometown have already pretty much dried up. Sales in pending around October 1st already fell apart.
• Owners will walk away from their properties if they can’t sell them.
• Lenders will take them back, and if they can sell them, I predict, as an appraiser, they will only get pennies on the dollar—from investors who are willing to take the risk of owning them without insurance—but only if they can buy them at a very low price.
• Formerly owner occupied homes will become tenant occupied homes, and that is not always positive in a neighborhood.
• After a low price is paid, for an arms’ length transaction, those new owners will promptly go appeal their property assessment.
• The assessment office will then shift more of the tax burden to owners who properties are out of the flood plain.
• Fewer people will carry insurance, thus when the next flooding hits, all of the taxpayers will be bailing them out.
None of this is a pretty picture, is it? We need Congress to fix this problem by acknowledging that the affordability step was too big a step to skip. To me, affordability would include an analysis of median sales price and median income. Is it reasonable for someone who has a house worth $10 million in a neighborhood where the median sales price is $9 million, and the median income is six figures to pay $12,000 a year for flood insurance? Well, its way more reasonable for that person to pay it than a person living in a community where the median sales price is $100,000 and the median income is around $40,000. Congress needs to look at the frequency and severity of the flooding There needs to be a differentiation between frequent, bad flooding, and very occasional flooding, caused by unusual circumstances (the last flood in my town was because Hurricane Agnes came inland and hovered for two weeks). Finally, Congress needs to understand that 5.6 million policy holders, most of whom are middle class, can’t make up a $24 billion deficit that took years to build.