In July 2012, three months before calamitous Superstorm Sandy, Congress passed the Biggert-Waters Flood Insurance Reform Act, designed to fix the financial mismanagement of the National Flood Insurance Program (NFIP). Among the proposed changes included increased rates, flood map re-zoning and mandatory changes in building requirements for high-risk areas (including new height requirements for homes built in high-risk areas). But these new changes could make many homes in the the NFIP's flood plains unaffordable to current homeowners and renters.
Many New Jersey and New York residents are still struggling to resurrect their homes, businesses and daily lives more than a year after the devastation of Sandy. But the cleanup is hardly coming cheaply – even those who have rebuilt their homes and businesses now find themselves wondering how they are going to meet the new regulations mandated by the NFIP.
Homeowners like Eileen Pepel, who learned too late about the requirement to raise her home, do not know how they could possibly come up with the money needed for stilts and other mandated repairs. To meet the NFIP’s new requirements, she will have to produce an additional $30,000, or resign herself to paying the dramatically higher premiums imposed by the NFIP. In some cases the new insurance rates will increase more than 2,000 percent.
According to Pepel, “It’s not in the realm of reality. Before we did any work, I would have raised my house right away, but now, it’s too late.” Pepel is an unemployed school teacher who was a victim of downsizing after the storm.
Officials now believe the new changes to the NFIP may just have a reverse effect. If homeowners cannot afford the new hike in premiums, many will forgo purchasing insurance altogether. Mortgage notes require that homeowners and landlords maintain an active policy, but if the flood insurance premiums are too expensive, borrowers may still neglect to pay them, or default on their mortgage altogether if the flood insurance is escrowed. Which is, of course, the last thing anyone wants: a "flood" of new foreclosures on the market.
And not only are some real estate owners refusing to pay the high premiums, but some have insisted they will not make the recommended changes to prevent major damage in the future. Understandably, many affected homeowners feel like victims all over again, subject to the whims of nature and Washington lawmakers alike.
While there are clearly no winners when disasters strike, most analysts agree the solution to rebuilding after particularly devastating disasters should be a coordinated, systemic approach involving homeowners, private insurance companies and the government. According to Representative Michael Grimm (R-NY), there may be help for homeowners to raise their homes through New York City’s Build it Back program.
Currently on Capitol Hill, Grimm and other lawmakers from both sides of the aisle are looking intently at what can be done to lessen the blow to real estate owners around the country, particularly those in high-risk areas. A bill has been introduced to delay the inevitably high premiums to new buyers who purchase homes from owners with previously subsidized payments, or for individuals purchasing homes in the newly zoned areas.
The NFIP is managed by the Federal Emergency Management Agency, certainly no stranger to bad press, and, more importantly, bad management practices. Much of the criticism leveled against the NFIP has been related to its perennially below-cost rates; the program reportedly collects $3.5 billion in premiums each year, leaving another $1.5 billion needed in subsidies to cover its $5 billion cost. The NFIP is said to have accumulated approximately $25 billion in debt since its’ inception in 1968.
Which, of course, is why the 2012 law was passed in the first place: to bring the NFIP out of the red. But that does not make the pill of suddenly-skyrocketing insurance premiums any easier to swallow for those with property in flood plains, many of whose homes would suddenly go from barely affordable to unaffordable.
Lawmakers remain hopeful, but uncertain whether the new proposed changes to the 2012 law will be passed and effective. One selling point of the bill amendment, if passed, is the proposed affordability study on risk-based rates and other alternative solutions to the affordability dilemma.
What are your views of insurance rate increases for high risk areas? Should everyone carry the burden or should those who bought properties in flood-prone areas carry the entire burden? Will the new flood map changes affect your properties?