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Thursday, October 10, 2013

Flood insurance costs on the rise

Changes enacted by Congress lead the increase

Real estate agent Rebecca Steffes found a starter home in Glendale for a young couple living on a tight budget.
They made an offer for the two-bedroom, one-bathroom house. Then they checked to make sure there were no hitches.
That's when they learned recent changes in the National Flood Insurance Program would cause the flood insurance premiums for the small house, which is not far from the Milwaukee River, to jump from less than $900 a year to about $4,500 annually within five years.
"There was no way they could afford the flood insurance for the home at that point," said Steffes, of First Weber Group. "It killed the deal."
Real estate professionals and bankers say there are many similar situations on the way.
They contend that changes required by Congress in 2012 when it granted a five-year extension to the flood insurance program — intended to ensure premiums reflect the true risk of being in an area susceptible to flooding — are going to disrupt the real estate market and lead to more foreclosures.
The real estate and banking industries are urging Congress to force the Federal Emergency Management Agency, which determines flood insurance rates, to hold off on the phase-in of higher premiums until an affordability study is done to show the economic impact.
But others, including the insurance industry and FEMA, say it's time to stop subsidizing premiums on flood-prone properties that file the kind of large claims — sometimes repeatedly — that have left the National Flood Insurance Program in the red.
"You want the rate to match the risk so that you are communicating the risk of living in certain areas," said Jimi Grande, senior vice president for federal and political affairs for the National Association of Mutual Insurance Companies in Washington, D.C. "You want people to know, you can go build that house on the beach, but it's not $500 a year any more, it's $5,000 a year. That's the actuarial risk."
In Wisconsin, the effects of the Biggert-Waters Flood Insurance Reform Act of 2012 won't be felt as widely as in coastal states that are in the line of repeated severe flooding.
Florida has the most flood insurance policies — about 268,650 — that are considered subsidized and priced artificially low, given the properties' flood zone location. Wisconsin has only 7,655 such subsidized properties, according to FEMA data.
Nonetheless, to property owners in areas of Wisconsin that have had serious flood damage, it will be an expensive proposition.
Among the changes mandated in the new law, according to FEMA: Owners of non-primary residences in what's called Special Flood Hazard Areas will see 25% increases annually until rates reflect the true risk. Starting this month, subsidized policies on property that has experienced severe or repeated flooding also will receive 25% annual hikes in premium.
Primary residences in flood hazard areas will be able to keep their artificially low rates until the property is sold, the policy lapses, it suffers severe or repeated flood losses, or a new policy is purchased, FEMA says.
James Dunker, an insurance broker in Waukesha with Robertson Ryan & Associates, has one client with a house in Washington County whose annual flood insurance premium is predicted to rise to $2,600 from about $600.
"The attempt is to take away all the subsidies, all of the grandfathering, all of the things that used to keep rates low, and they are making them stand on what the rate actually should be," Dunker said.

No simple solution

The National Flood Insurance Program, which was created in 1968, is more than $20 billion in debt to the U.S. Treasury, in part because of claims stemming from Hurricane Katrina in 2005 and last year's superstorm Sandy.
"They are good reforms," Grande said. "Some of them will be painful to some consumers. But more consumers win than lose, and ultimately it gets us to a stronger place where we have a better program. Because if the program goes bankrupt and disappears, we're all in big trouble."
He said there might be ways to ease the blow for property owners in some cases. Those with huge increases should perhaps qualify for some kind of FEMA help, he said.
"But you don't want to take what's happening for maybe 2% or 3% of the properties and create a rule that then extends to all 5.7 million of them," Grande said. "Maybe there's a program that finds those worst-case scenarios and has a buyback program. I'm not saying we shouldn't do that kind of stuff. We need to find a way to make it work for everybody who's a participant in the process."
Grande added: "It's too easy for politicians to say, 'Rate increases? I'll fight that. Don't you worry.' They're not helping their constituents, they're exacerbating the problem."
But real estate professionals and bankers are worried the changes in the National Flood Insurance Program, which includes redrawing flood zone maps — a step some fear will put more properties into higher-premium areas — are a threat to mortgage borrowers and lenders.
Donna O. Smith, a Greer, S.C., Realtor who is leading a study on the impact of the new flood insurance law, said there is "alarming concern from all across the country about huge rate increases, and there is a lot of confusion."
"We are asking for a slowdown until FEMA can catch up and do their part," Smith said. "They should do an affordability study, which hasn't been done and should have been done."
Paul Merski, chief economist for the Independent Community Bankers of America, said spikes in flood insurance premiums could leave some property owners unable to repay their mortgages, leading to foreclosures. In other cases, flood insurance premiums are likely to become so high they will make certain properties very difficult to sell, he said.
"What we've been pressing for in Washington is, at a minimum, delaying these sharp increases in flood insurance premiums until FEMA can complete an affordability study that was part of the law passed last year," Merski said.

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