Coast has wave of worries as federally subsidized flood insurance nears end

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Published: September 20,2013

Tags: Business, flood, Gulf Coast, insurance, Mississippi, real estate

flood zone_rgbJust 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.”

 

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4 Responses to “Coast has wave of worries as federally subsidized flood insurance nears end”

  1. Bryan Says:

    While the rate increases are inaccurately presented at the beginning of the article (the law requires 20% a year increases for primary residences based on the difference of what you are currently paying and what the law will require you t pay: i.e. if you pay $1,000 now and the law says you should be paying $11,000, your rate will increase $2,000 a year for 5 years), the end of the article says it all. While supporters of this law say these properties should be paying “actuarial rates,” that is not what is actually happening. In addition to the actual rate of the insurance, homeowners will be required to get the program out of the $24 billion deficit in 10 years! So how is that actuarial rates if a person has to pay for the full value of the property every 8-10 years?

  2. Michael Wardlaw Says:

    My wife and I have been looking at properties in Long Beach and Pass Christian along Highway 90 so that we can retire. The rapid increases in flood insurance premiums is given us plenty of reasons not to buy! It is such a nice area with a rich heritage and it is a shame a more reasonable approach seems out of reach.

  3. Cheri Says:

    this is NOT just a coastal issue, but instead, a National issue affecting nearly 1.2 million Americans, with far reaching ramifications that affect our nation, as a whole.

    IE: My friend lives in a home, valued at approximately $70,000, about 2 miles from the coast. She is the last person in her block that is located, in flood zone AE. If the quotes from the insurance agents are accurate, her premium in November will escalate. She has a small mortgage on her home and is required to carry flood insurance. She lives on social security and a small pension. She cannot afford any increase in premium.

    For years we have been living under the delusion that we were paying our premiums. Never realizing that our flood policies were “subsidized” by the federal government. A GOVERNMENTAL bait and switch, if you will.

    “Had I known 18 years ago, that one day, I would not be able to afford my insurance premiums, unless I elevated my home, I would have never done the renovations and additions to my property.”

    This has been kept under wraps by our government officials and they need to be reminded of their duties to the people they represent. As well as the cost to our nation.

    Nationally – every coastal state, river plain area, etc. is wholly affected, just as we are. Every community and business, whether located directly on the water or further inland, in a flood plain, is affected. A deluge of mail from their constituents should get our government official’s attention.

    This National problem, I fear, will effect our economy. This issue may well be the NEW decline of the housing market and banking collapse. Even the stock market may be affected.

    Many people have stated they cannot afford these immense premiums (again, no one knew their premiums were subsidized). Most have stated that they will wholly stop paying their mortgages. Ride out the foreclosure process and let the banks take back their homes.

    Others will choose to cash out retirement savings & stock accounts to pay off mortgages. So that they won’t have to carry flood insurance at all, causing potential problems in the stock market, as well as reducing their retirement income for the future and incurring excess taxes, via capital gains, which could have been deferred till retirement, plus penalties for cashing out IRA’s and 401K’s.

    Citizens throughout the country need to be advised to tackle this problem. This is not something we, as a community, are facing alone. Remember 1.2 million Americans and businesses, both coastal and inland, are affected. The ripple effect of the Biggert – Waters Flood Insurance Reform Act could be devastating.

  4. Jay Williams Says:

    The $24 billion deficit in the flood program was caused by the negligence of the US Army Corp of Engineers and Orleans Levee Board. Two levee breaks in New Orleans during Katrina flooding the entire city. Katrina went to the east of the city and had the leveies not been poorly designed and poorly maintained, they would not have failed causing the massive losses to the flood insurance program. US Army Corp of Engineers has acknowledged this and has spent 19.3 billion constructing a new levee system so it will not happen again.

    Bottom line is that no changes were needed to keep the flood insurance program solvent other than an injection of cash from the corp of engineers for their negligence.

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