As flood insurance premiums creep higher, the Federal program that provides flood insurance to 5 million policyholders is about to expire. If Congress doesn’t take action to reform and reauthorize a program that is $24 billion dollars in debt, the housing market may suddenly find itself in deep water.
The increase in flood insurance premiums is bad enough. They are going up about 6% a year according to FEMA. The average premium is $878 not including whatever surcharges may apply. FEMA says high-risk properties, second homes, and properties with previous flood claims could see bigger increases.
FEMA has been gradually raising rates as part of a previous reauthorization of the program five years ago. Those rates were adopted to help bring the cost of reimbursement closer to the cost of flood damage, but are far from enough to get the program out of debt.
Now the NFIP is up for reauthorization again, by September 30th. If Congress does nothing, The National Association of Realtors says the sudden lack of affordable flood insurance would: “deal significant damage to current policy-holding property owners and would threaten property sales and the broader housing market.”
Flood insurance is required if the owner has a mortgage, and the property is in a flood zone. It is also required if a mortgage-holder has received flood assistance in the past. NAR says those 5 million policyholders are spread across 22,000 communities and they all rely on this critical relatively affordable insurance.
The New York Daily News writes that if the federal program expires, flood insurance premiums would skyrocket in the Big Apple. The mayor’s office says premiums would increase by an average $2,000 a year and would suddenly become unaffordable for many low-income families. Because flood insurance is mandatory for mortgage-holders, the mayor’s report says the situation could trigger a foreclosure crisis.
It will also cause chaos for home sales, as its done in the past. When it expired in 2010, NAR says: “1,300 home sales were disrupted every day as a result. That’s over 40,000 every month.” NAR says without the NFIP and the necessary flood insurance, buyers were not able to get a mortgage or the protection they need from devastating floods.
The nation was hit by 91 weather disasters last year. There were 19 major floods, and $4 billion dollars in flood damage. The total number of disasters was the second highest in the U.S. It was a record year for floods.
The worst 2016 flood occurred in Louisiana last August. It killed at least 13 people and destroyed some 60,000 buildings. Total damage was $10 billion dollars. That’s the worst flood since Hurricane Sandy in 2012 along the Eastern Seaboard.
We spoke with Florida landlord, Connie, about Hurricane Matthew last September, and flooding in the St. Augustine area. The hurricane caused more than $10 billon in total storm-related damage, including floods. Hanson says the monster storm was a big surprise because hurricanes usually steer clear of St. Augustine — but not this time.
Her husband, Michael, owns two duplexes on the beach that were inundated with salt water from the ocean. Unfortunately, he canceled his flood insurance just a few years ago because it was expensive and he didn’t think it was necessary. After all, hurricanes never hit St. Augustine.
The tenants had evacuated so they were not hurt, but his four rentals were heavily damaged. He spent about $30,000 on repairs, gave the tenants a free month’s rent for the inconvenience of staying with friends and relatives, and had them back in their units about five weeks later.
But, he’s still faced with residual effects from the hurricane. The county requires permits for things as simple as painting and sheetrock, which he’s still trying to get retroactively. There’s also concern about saltwater damage to appliances, like air conditioners. Salt water can decrease their life spans considerably. One of his four units just failed, only months after the storm.
He’s now planning to re-insure his units against flood damage, but not because he has a mortgage. He owns the buildings outright, but said he’ll get the insurance under threat from his wife. He says: “Connie said she would beat me in the head with a very large object if I didn’t get flood insurance.”
He expects to pay about $1,500 a year for each duplex. He plans to get it by the end of the month to allow for a 30-day waiting period before the hurricane season begins again, in June.
And then there are stories about other landlords in the same area. Connie says some people lost everything because their properties sustained extensive damage, and they didn’t have flood insurance. She says many properties simply became unsalvageable.
The area was declared a disaster from Hurricane Matthew but Michael says, as a landlord, he didn’t get a dime. He says he was told by FEMA to call the Small Business Administration for help, which he did. He was offered a low-interest loan, but no disaster relief.
This is a good lesson to landlords: If you have properties in a flood zone, you should consider flood insurance. You may also push for the reauthorization of the program that will let you buy it. The cost of the insurance could save you tens of thousands of dollars, if you get hit by a flood.
Connie added that having this insurance doesn’t mean it’s a piece of cake collecting payments from FEMA. She says she’s heard plenty of stories of paperwork and hoops to jump through causing delays in repairs.
As for what needs to be done to get the program reauthorized — NAR says: “The NFIP isn’t perfect, and reforms are needed.” For one, the program is $24.6 billion dollar in debt. NAR says: “It’s time for action. Congress has six months to do the right thing and pass a long-term reauthorization of the program. We’re hoping they do just that.” That could mean even higher premiums to help offset losses.
SmarterSafer.org has compiled a list of suggestions for NFIP reforms. SmarterSafer is a coalition of groups in favor of “environmentally responsible and fiscally sound approaches to natural disaster”.
Suggestions include updated flood maps to provide more accuracy and better risk analysis. That will help property owners better understand what they are up against.
It also suggests private sector competition for flood insurance. This could bring premiums down and raise coverage limits.
SmarterSafer also wants to see rates based on risks, with assistance for low-income property owners. And, it wants to see subsidies for property owners that do things to reduce their risk. Presumably, that could be something like “elevating a home”.
The fourth suggestion is for environmentally responsible risk reduction. That would be a community-level effort to reduce risks in high-risk areas.
One final note about flood insurance — a recent survey by “InsuranceQuotes” shows that 56% of homeowner’s don’t know that standard home insurance does “not” cover floods. For millennials, that percentage rises to 67%.
It’s good to know what your insurance covers. If you have a dog, and your dog bites someone off your property — guess what? InsuranceQuotes says it’s covered!
Also, standard home insurance usually covers damage from hurricanes, but that doesn’t include flood damage — only for damage caused by wind — or possibly wet wind — but not floods.
If you want to assess your flood risk, we’ll have a link on our blog to a handy little tool that can tell you what you need to know.