[REN #706] FEMA Flood Insurance Overhaul

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Picture of Flooding for Real Estate New for Investors Podcast Episode #706

A major overhaul of the National Flood Insurance Program is finally underway in Congress. (1) It’s been in desperate need of reform for years as storms grow more severe and the program falls into more debt. The new plan is expected to increase insurance rates in flood-prone areas. It could also impact home values in those areas, but the cost to insure individual homes will more accurately reflect the ongoing risk.

The National Flood Insurance Act

The government created the flood insurance program decades ago, after private insurers stopped offering it. It was once included in a typical homeowners policy, but many private insurers started selling it separately in the 1950s as flooding and flood damage became more common. Heavy flooding from the Mississippi river in the 1960s apparently convinced most of them to stop issuing it altogether. That’s when the government stepped in. Congress approved the National Flood Insurance Act in 1968 and created the National Flood Insurance Program.

Congress has typically passed long-term reauthorizations, but since the end of 2017, it has issued ten short-term extensions because of a desperate need to reform the program. And when Congress misses that deadline, that has interrupted coverage and interfered with home sales that require coverage for a home loan. According to the National Association of Realtors, a lapse in the program prevents more than 1,000 sales a day from closing. (2)

Flood Insurance & Management

The NFIP is managed by FEMA and currently provides insurance to more than 5 million homes and businesses. Total value of this coverage is more than $1 trillion. The basic goals of the program are two-fold:

  1. To provide access to flood insurance
  2. To help reduce the risk of flooding through floodplain management

The program was mostly self-supporting until 2005 when it suffered extraordinary losses from Hurricanes Katrina, Rita, and Wilma. Those catastrophic events were followed by other major weather events including Superstorm Sandy in 2012 and Hurricane Matthew in 2016. In 2017, we had Hurricanes Harvey, Irma, and Maria. In 2018, there was Florence and Michael. The program has accrued $36 billion in debt since 2005. Congress has forgiven $16 billion, but the program is still struggling with $20 billion in current debt.

Now, the NFIP is set to expire again at the end of May. Instead of kicking the can down the road with another short-term extension, Congress is debating changes that will make the program more sustainable. The House Financial Services Committee held a hearing on March 13th called “Preparing for the Storm: Reauthorization of the National Flood Insurance Program.” Committee members heard from several witnesses including real estate broker Mabel Guzman, from Chicago, who spoke for the National Association of Realtors. (3)

NAR Testifies at Hearing

She commented that floods are getting worse, and have totally destroyed some places like Mexico Beach, Florida and a good portion of Puerto Rico. She also pointed out that it’s not just a coastal issue but one that’s also affecting inland areas, such as the floods in Houston. She said, “Harvey’s landfall and storm surge did not cause most of the flooding in Houston. It was the over 4 feet and 27 trillion gallons of rain dumped on Eastern Texas over six days. That, combined with inadequate infrastructure and mapping contributed to the destruction, which extended well beyond FEMA’s flood zones.” She says her own city of Chicago struggles with flooding, and that half of the states devastated by floods since 1990 have been landlocked.

As you know, flood insurance is crucial for many homeowners — not just to protect them against potential losses due to flood damage, but as a home loan requirement if the home is located in a high-risk flood area. According to Guzman’s testimony: “The program is essential to completing half-a-million home sales per year while each sale contributes two jobs and $80,000 to the economy.” She says, “The program was not designed nor intended to address the catastrophic loss years we have seen since 2005.”

Among the reforms that NAR would like to see:

  1. Long-term reauthorizations, as opposed to short-term extensions.
  2. High-resolution flood maps that show more details about at-risk homes.
  3. Tailored premiums that more fairly reflect the risk for individual properties.
  4. Help for at-risk homeowners who’d like to move to higher ground in the form of guaranteed loans, grants, or buyouts.


Calculating Real Flood Threat for Each Home

These are the kinds of issues that lawmakers hope to address in this new policy. According to Bloomberg (4), which got a hold of a briefing document from last October, “The Federal Emergency Management Agency plans to use private-sector data to calculate the real flood threat for each home and set costs based on that data.” The document claims that the goal is to provide more transparent and understandable costs.

While some homeowners would see a decrease in the cost of their premiums, others would see them rise. Home values could also be impacted. For those with an increased flood risk, Bloomberg reports, “Not only do higher premiums raise the cost of owning a home; they also act as a warning to potential buyers about the likelihood that a house will flood.”

Bloomberg asked NAR spokesman Wesley Shaw about the potential effect on home values but he said, “We need to wait and see what FEMA comes out with before we can evaluate the market impact.” He also said, “We welcome FEMA’s efforts to modernize and improve the fairness of its ratings methods.”

We should see the new policy proposal soon, before the May 31st deadline. We’ll be keeping watch for an update on what could be the first major upgrade to flood insurance in many years.


(1) Financial Services Memo

(2) National Association of Realtors

(3) Financial Services

(4) Bloomberg Article

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