Flood Insurance Rate Hike Threatens More Foreclosures

In July 2012, the U.S. Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 (BW-12) which calls on the Federal Emergency Management Agency (FEMA), and other agencies, to make a number of changes to the way the National Flood Insurance Program (NFIP) is run.

Biggert-Waters was intended to help keep the National Flood Insurance Program alive after suffering huge losses from Hurricane Katrina.  The “key” to the bailout was getting rid of subsidized rates; in some cases gradually and in other cases, such as the sale of a home, in one fell swoop.

Most flood policyholders nationwide will see only single-digit increases in rates next year. In fact, just 20 percent of all flood policies in the United States are subsidized. But in Florida, the impact will be much greater.  With 40 percent of all flood policies nationwide, Florida has by far the most subsidized homes.

House reps said that the flood insurance program needed to be retooled to bring stability to a flood insurance program that had lapsed 18 times in previous years; causing several interruptions in the program that prevented new policies from being issued.  Several times, house closings had to be postponed when home buyers couldn’t purchase a required flood insurance policy due to these lapses.

This new bill allows for rate hikes in flood insurance as high as 20% per year.  Backed by the House and several interest groups such as the National Association of Realtors, no one seemed to recognize the disastrous risks that passing this Act would bring until it was too late.

For someone staying in a subsidized home in a high-risk flood zone, rates will typically rise 16 or 17 percent October 1, 2013.  That doesn’t include a 5 percent charge toward the new flood reserve fund.

The impact is more immediate, and devastating, for recent buyers of subsidized properties, or those who let their subsidized policies lapse such as those in foreclosure.  After Oct. 1, their premiums will reflect the full “risk-based” rate, typically adding many thousands to their premiums yearly.

For instance a buyer who planned to purchase a 900-square-foot home in Sanibel cancelled the purchase asfter he he found out the flood premium would jump from $2,440 to $16,092 when he renewed next year; a nearly 8-food rate hike!

There are several measures being discussed in both the U.S. Senate and House of Representatives to stave off “unintended consequences” of Biggert-Waters.  But so far the sole measure that has passed the House would delay only a small part of the law, and wouldn’t stop the premium hikes from hitting new buyers of subsidized properties.

On Monday, the Independent Community Bankers of America echoed calls for a freeze on any increases until FEMA can complete a study on the impact on home affordability.  Moving forward Oct. 1 threatens to price people out of their homes, destroy home values and disrupt the housing market’s recovery, the bankers group maintained.

Garret Graves, chair of Gov. Bobby Jindal’s Coastal Protection and Restoration Authority, tweeted that the flood insurance program hasn’t been the drain on taxpayers claimed by proponents of Biggert-Waters. He said the program collected $65.3 billion in premiums since 1978, but only paid out $56.4 billion to policyholders.

This Act further will have a devastating effect on the already fragile Florida housing market.  Thousands of homeowners will be unable to afford these massive rate hikes and fall into breach of their mortgage with their lenders, putting them into foreclosure in the already clogged court system.

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