Just as hurricanes Camille and Katrina altered where people built houses and businesses on the Mississippi coast, the Biggert-Waters Flood Insurance Reform Act of 2012 promises to significantly change the makeup of home and business ownership along the state’s 45-mile expanse below Interstate 10.
The state felt some of the first effects in July 2012 when new property owners in federally designated flood zones could no longer receive federal flood insurance subsidies. More effects are set to be felt on Oct. 1 when flood zone properties that have sustained repeated flood losses or fallen victim to substantial damage must pay full freight.
More far-reaching for a coastal zone dotted by homes a half-century old or more is the Oct. 1 rate hike of 25 percent on homes built before the federal government drew the first flood maps in 1974. The 25 percent yearly increases are to continue until the Federal Emergency Management Agency decides rate levels reflect actual risk, a benchmark the agency terms “actuarially sound.”
Then, starting on Jan. 1, premiums on vacation homes and rental properties within the zones are scheduled to go up 25 percent annually and continue year until actuarial soundness is reached.
In the not-too-distant future, all coastal Mississippi homeowners within a flood zone will lose their “grandfather” status, which brings an accompanying loss of the federal subsidy and the likelihood that what now costs around $425 a year will go to $7,000 or higher. When that occurs hinges on the next FEMA flood remapping on the coast, the last of which occurred in 2009-2010. The agency has told U.S. Rep. Steven Palazzo’s office to expect the new mapping in 2017-2018, the office says.
With Biggert-Waters in full force, federal officials expect to be on their way toward erasing the National Flood Insurance Program’s $24 billion deficit.
A detour could be straight ahead, however.
The prospect of escalating premium increases on older homes, rental properties, commercial buildings and newly purchased homes, has led coastal region lawmakers such as Palazzo as well as congressional delegations from other flood-prone areas of the country to push for a delay of Biggert-Waters of at least one year. The House has passed legislation specifying a delay and is awaiting Senate action.
While Congress may ultimately decide to put off major provisions of Biggert-Waters for 12 months, the bill’s implications – and the uncertainties it has created for the coastal real estate market – are here to stay, real estate and insurance executives say.
Gulf coast property insurance executive Ned Dolese sees the potential for $7,000 annual flood insurance premiums to cause a real estate collapse. “If you liked TARP (the Troubled Asset Relief Program) you are going to love BW-12,” said Dolese, marketing manager for Coastal American Insurance.
With Biggert-Waters set to affect $6 trillion in real estate nationwide, the measure “will make TARP look like a walk in the park,” he predicted, referring to the nearly $1 trillion banking bailout of the last decade.
Coastal America has close to 3,000 policies on its books three years after its startup. It requires policy-holders to have both wind and flood coverage as a way to avoid origin-of-damage questions on a claim. That provision is too important to waive for a company founded on the principle of coordinating property loses under flooding and wind, Dolese said.
“We are looking at the real possibility we could lose policyholders,” he said, and noted neither current homeowners in coastal flood zones nor buyers of the homes in the zones can afford the vastly increased rates.
“The problem is no one is going to pay $8,000 a year for flood insurance,” he said.
What happens next? “Houses become unsellable,” he said.
And as the houses become unaffordable for those living in them now, foreclosure could be the only way out, Dolese added. “I expect that people will say I am not going to go broke paying for flood insurance and here are the keys to my house.”
Ken Austin, a Pass Christian real estate broker and president of the Mississippi Association of Realtors, is not making predictions either way. “I’m not going to speculate,” he said, adding that for the moment, he prefers to put his faith in a congressional delay.
The biggest issue, Austin acknowledged, “is the uncertainty that is giving people pause.”
Regardless of whatever orbit Biggert-Waters launches flood insurance rates into, banks won’t be awarding home mortgages to buyers in flood zones who don’t carry flood insurance, said Chevis Swetman, CEO & president of Peoples Bank in Biloxi.
“The feds won’t let us do it,” he said.
Peoples Bank extends its flood insurance requirement to some properties outside flood zones. “If you can see the water, you are going to have flood insurance,” Swetman said of his bank’s lending policy.
And, he added, “If your house flooded in Katrina,” a buyer will have to get flood insurance before getting a Peoples Bank mortgage.
“You can walk to the bank across the street and I don’t care.”
Swetman predicted banks will protect themselves from borrower give-backs by requiring borrowers to make larger down payments, say, of 30 percent to 35 percent.
None of this bodes well for the real estate market, Swetman conceded.
Already, he said, “I know of several transactions that have cratered. The guy who is going to buy” got cold feet over flood insurance worries.
Even now, building on the coast forces you to spend $40,000 to $50,000 extra to build up to double-digit elevation requirements, Swetman noted. Toss in the new, higher flood insurance rates, property insurance and mortgage insurance and suddenly “your insurance is going to be larger than you mortgage payment,” he said.
Like Dolese and Austin, Swetman wants Congress to call a time out. The goal should be to set flood insurance rates that reflect genuine risk – not a desire by the federal government to wipe out a $24 billion deficit with five years of drastic rate increases, he said.
“I think it is going to be over a period time” that the rates will increase incrementally “until we can get something on an actuarial basis.
“It might take 10 years, it might take 20 – but “to say you’re going to get back to an actuarial basis in five years. Come on!”
Dolese said he, too, thinks the any solution must start with rates that reflect risk and not elimination of a sizable program deficit.
The solution must also start with an understanding that grandfathering of low-cost flood insurance rates is dead and gone, he said. “Everybody should agree that $415 (a year) was a fictious rate.”
Any solution for the Mississippi coast, he said, should include rate discounts for property owners who elevated their structures after Katrina to meet flood maps drawn in 2007 and again in 2009-2010.
“So that would take the $7,000 premium down to $2,000. If you can’t afford $2,000 to live here, then you need to move.”