A law intended to make the National Flood Insurance Program sustainable could carry disastrous consequences for the nation's housing market.
The Biggert-Waters Flood Insurance Reform Act of 2012 was intended to make the flood insurance program sustainable by charging customers actuarially sound rates as determined by the Federal Emergency Management Agency.
Section 205 of the act, which ends or phases out subsidized rates for Pre-Flood Insurance Rate Map properties, took effect on Oct. 1, 2013. Provisions of the Act that would phase out subsidized rates for "grandfathered" properties are slated to take effect next fall.
However, real questions remain as to the true financial position of the program, and whether FEMA's procedures and risk models reflect the true risk of a structure flooding.
Furthermore, as a result of the law, flood insurance premiums will dramatically increase for many home and business owners across the country. These increases will render many Americans living in flood hazard areas unable to stay in their current homes.
One of the bill's authors, Maxine Waters, D-Calif., has called for a delay in the law's implementation, admitting that, in its current incarnation, the law would have "unintended consequences" for homeowners.
"Since the law was enacted, we have seen a slew of confusion in FEMA mapping," she said in a statement published by the Insurance Journal. "In addition, many families now face increased costs that will make homeownership so expensive that many would be forced from their homes or find it impossible to sell. This is unacceptable."
According to Insurance Journal, other government officials, including FEMA Director Craig Fugate and Mississippi Insurance Commissioner Mike Chaney, have taken steps to try to get the law changed. But more policymakers must take action.
Congressman Waters' assessment is accurate. Congress did not have accurate information as to the extent of the flood insurance premium increases when voting on this law and, therefore, was unable to make an informed decision on its efficacy. The pain will be real and negatively impact businesses, homeowners, property values and, in some cases, entire communities.
In Louisiana, an assessor has already taken preemptive action by decreasing the assessed value of residences in his jurisdiction specifically citing this flood insurance law as the cause.
Biggert-Waters also presents a number of specific concerns to lenders. The most obvious concern is that some borrowers will be priced out of their home or business and forced to try to sell or relinquish the property to their lender. Some properties may become unsellable due to cost-prohibitive flood insurance premiums. How will this impact lenders' mortgage loan portfolios? On a broader scale, how will this impact some local economies and tax bases?
Also of great concern is a lender's obligation to force-placed flood insurance coverage. Federal law requires lenders to force-place insurance (purchase coverage on the borrower's behalf) in situations where a borrower allows flood insurance coverage to lapse. Therefore, lenders may be responsible for exorbitant flood insurance premiums that their borrowers cannot afford to repay. The above examples are just a few illustrations of the many questions and consequences property owners and lenders will encounter under Biggert-Waters.
The Louisiana Bankers Association has been working on getting answers to these questions from banking regulators, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve. We've also asked these regulators questions related to escrow of flood insurance premiums and lender notification requirements to borrowers.
The FDIC met recently and issued a proposal for comment on flood insurance under Biggert-Waters. I encourage lenders to read the proposal and share their feedback through the comment procedure.
Moreover, Congress needs to take action now to address the flaws that are apparent in the law.
Robert T. Taylor is chief executive officer of the Louisiana Bankers Association.