Congress is considering sweeping changes to the debt-laden National Flood Insurance Program that could jack up flood insurance rates for hundreds of thousands of homeowners under a bill that a Florida real estate group called “devastating.”
The proposal, part of a flood-insurance package with a Sept. 30 deadline, could prove costly to homeowners in flood-prone regions ranging from Florida to Texas to California’s Central Valley. It would primarily affect homeowners with low “grandfathered” rates based on flood maps that have changed since they purchased their homes.
“This could be devastating to so many people,” said Maria S. Wells, president of the Florida Realtors trade group, which has 175,000 members statewide. “People don’t realize they could be remapped into a much more high-risk zone.”
Rep. Sean Duffy, a Wisconsin Republican who introduced the 21st Century Flood Reform Act, agreed the change could deal a financial blow to some homeowners, over time. But the current practice, he argued, is unfair to households that live outside of floodplains. Through their tax dollars, they subsidize a relatively small number of homeowners who own property near the coasts, rivers and other waterways.
Duffy said he’s open to amending his legislation to address affordability concerns — but not if it keeps the current subsidy system in place.
“We are not talking about the poorest people in the country,” said Duffy, who represents a wide swath of northern Wisconsin. “You have subsidies going to these wealthy homeowners on the coast.”
Congress has until the end of September to reauthorize the National Flood Insurance Program, otherwise the program will lapse, preventing people from buying flood insurance. When that impasse last happened for a month in 2010, an estimated 46,800 home sales transactions were interrupted or canceled, according to the National Realtors Association.
Last month, a key House committee approved seven pieces of legislation aimed at improving the solvency of the insurance program, which owes $25 billion to the U.S. Treasury.
The full House is expected to consolidate and vote on the whole package — including the part that would increase insurance rates — before the August recess, but affordability may hamper its passage. If the House and Senate can’t pass and reconcile their two reauthorization bills, Congress could miss the Sept. 30 deadline, and the housing market could see a repeat of 2010.
At issue is the insurance program’s practice of “grandfathering” premiums, which allows homeowners to continue paying relatively low insurance rates even when the Federal Emergency Management Agency, or FEMA, changes its maps to account for newly discovered risks. The practice is based on the concept that people with homes built to the required codes at the time of purchase shouldn’t be penalized when those codes change.
Under Duffy’s bill, as now written, no new grandfathering would be allowed after four years, and premiums on existing grandfathered policies would rise 8 percent yearly until they reach full-risk rates.
No one knows for sure how many households could be affected by the change, but Duffy said FEMA has told him it could number 500,000 or higher. The increased premium costs could be sizable.
For example, FEMA’s rate tables show that a home in an “A Zone” of Special Flood Hazard Area — typically near a lake, river or coastline — that now costs $3,000 a year in insurance premiums could rise to $5,000 a year if FEMA determined that expected flood elevations were two feet higher than previously mapped.
Wells, a real estate broker with offices in Florida and Pennsylvania, said one frequent criticism of the program — that rich people benefit disproportionately — is a myth. Under the program, flood damage claims are capped at $250,000, much less than full replacement for a wealthy person’s home.
“People talk about beach-side mansions, but I can tell you, they don’t use NFIP,” she said. “They use Lloyds of London.”
Proponents of the legislation, however, say that construction of ever-more-valuable homes along the coast and on floodplains adds to the risks being covered by the taxpayer-subsidized flood insurance program. Subsidies, they argue, encourage more people to build and buy homes on floodplains, perpetuating the program’s debt.
“We need to transition to sound actuarial rates,” said Rep. Jeb Hensarling, R-Tex., chairman of the House Financial Services Committee, which approved the legislative package last month. “Otherwise, we are putting more people in harm’s way.”
Federal flood insurance has long been the subject of a congressional tug-of-war, especially following Hurricane Katrina in 2005 and Hurricane Sandy in 2012. In 2005, FEMA borrowed more than $17 billion from the U.S. Treasury to pay claims damages, and Hurricane Sandy triggered another $9 billion in borrowing.
As of late 2016, close to five million households nationwide held federal flood insurance policies, according to FEMA. Florida was the largest, with nearly 1.8 million policy holders, followed by Texas with 608,000, Louisiana with 472,000 and California with 295,000.
The issue is complicated by the fact that many U.S. cities were originally built along coastlines and rivers and are now deemed vulnerable to extreme flooding. Scientists say that with sea level rise and stronger storms expected from global climate change, the U.S. Treasury is to sure to take future big hits from flood disasters.
To reduce the mounting debt, Congress in 2012 passed the Biggert-Waters Flood Insurance Reform Act, which was “designed to allow premiums to rise to reflect the true risk of living in high-flood areas.” But two years later, following an outcry from affected homeowners, Congress scaled back the premium rate increases.
After President Trump took office, federal debt hawks saw a chance to revive provisions in the 2012 legislation, including ending “grandfathering.” That provision is part of the 21st Century Flood Reform Act introduced by Duffy.
Some of the House package has wide support from consumer, environmental and taxpayer groups. These include provisions aimed at removing obstacles for homeowners to purchase private flood insurance, improving the FEMA claims process, discouraging new development in floodplains and helping communities “mitigate” existing risks, such as elevating structures above expected flood depths.
There’s also agreement that FEMA needs to update its process for revising flood maps, although that goal could be complicated by Trump’s proposed 2018 budget, which calls for cuts to the agency’s mapping program.
Officials with the National Realtors Association fear the House will approve legislation to phase out grandfathering with no solid information on how many households would be affected and at what cost.
“We know for sure that homeowners will be hit hard if the NFIP is allowed to expire in September, but we need better data from FEMA before we can have a fully-informed discussion on flood insurance,” William E. Brown, president of the National Realtors Association, said in a statement to McClatchy. Without data, he added, “determining costs and risks both for homeowners and for taxpayers [is] tremendously difficult.”
Duffy, a former prosecutor and ESPN commentator, said his legislation is based on the principle that people should approach home purchases knowing that insurance conditions could change. He likened it to a consumer buying car insurance, knowing that premiums could go up if a teenager is added to the policy.
But Duffy also said he’s aware his bill faces opposition and he’s working to address the concerns about grandfathering.
“I am not a purist on this,” he said. “I want to get a bill that can pass.”