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Flood insurance rate shock

By Jay MacDonald · Bankrate.com
Friday, September 13, 2013
Posted: 6 am ET

Despite recent news coverage of catastrophic Florida sinkholes, many Floridians and their Gulf Coast neighbors are far more concerned these days with a frightening rise in flood insurance rates than with the remote possibility of ground collapse.

If you've been following the misadventures of the National Flood Insurance Program, or NFIP, two things are patently obvious: It's the only game in town for most homes in coastal and flood-prone inland areas because standard homeowners insurance doesn't cover flood damage; and the program is some $20 billion in the red, mostly due to losses from Hurricane Katrina in 2005.

End-of-the-line for subsidized rates

Those who recognize the name Biggert-Waters Act, passed by Congress last year, may be vaguely aware that the law is designed to shore up the NFIP. How? By allowing the program to buy reinsurance, just like other property and casualty companies, and replace its low, subsidized premium rates on decades-old homes in "Special Flood Hazard Areas" with actuarially-sound (and way more expensive) ones.

There's the rub. Under the act, any home or business in a high-risk area will lose its NFIP subsidy Oct. 1. Any NFIP-insured home sold after the act was signed in July 2012 has already lost its subsidized rate, sometimes leaving the new buyers with quite a housewarming present.

Rate shock

A front-page Tampa Bay Times story this week details the rate shock that Cristy and Fred Assidy experienced recently after they moved into their new home in St. Petersburg, Fla.

The story says during this first year, their premium through the National Flood Insurance Program is a "doable" $1,700. But next year it jumps to $17,000 -- for a house they purchased for $205,000.

For those not planning to move, Biggert-Waters takes on more of a waterboarding feel, with premiums expected to increase 20 percent each year for five years, on average, until they reach the "actuarially-sound" level. If you sell your home or let your flood policy lapse, the rate immediately jumps to the full risk-based level, adding thousands to the premium for an unsuspecting buyer or a delinquent homeowner.

Unintended consequences

The big question for many is: Can I afford to live in my home -- and, failing that, can I find a buyer who could? Real estate agents in particular warn that the flood rate re-deal could endanger an already fragile home market recovery, especially in Florida, which has 40 percent of all flood policies nationwide.

Even the bill's co-sponsor, U.S. Rep. Maxine Waters (D-Calif.), isn't pleased with what she calls the unintended consequences of her well-meaning legislation. In a letter to the Federal Emergency Management Administration, which oversees the NFIP, Waters asks for a review, noting that the adjusted rates are "unaffordable'' and will have "devastating impacts'' that will "force families out of their homes."

In June, the U.S. House passed legislation to block implementation of Biggert-Waters. Anxious homeowners are now hoping the U.S. Senate will follow suit and at least delay the law's rollout.

"Congress has essentially changed the rules in the middle of the game," writes Tampa Bay Times columnist John Romano. "You can't provide subsidized insurance for decades, then pull the rug out from under people in a matter of months."

Any readers out there been caught in these rising flood rates?

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Jay MacDonald is a Bankrate contributing editor and co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters.

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14 Comments
Chris
January 23, 2014 at 3:36 pm

Darren, you hit the nail on the head. Whoever thought of this wasn't thinking very well. I calculated $10,000 a year of flood insurance, over a period of 10 years is $100,000. That is more than most houses even cost. I understand your concern about selling the house, but the good news is someone out there will buy it. However, you are certainly right. It is going to drive the county straight into a hole. I still don't understand why we "have to" have flood insurance. It is our house, and if it floods and we aren't covered, it's on it. It should be our right if we want it or not, if you ask me. It's much more reasonable instead of where they will end up, with people simply walking away from there homes.

Kenny G
January 19, 2014 at 11:50 am

It's not just coastal properties insurance inflated I live in missouri and bought my home 11 years ago and with the remapping in 2009 I now have to carry flood policy which keeps getting higher every year from 850 to now 1450 in 3 years. I have home listed cause of this but nobody is interested because of this.. I think the government should purchase property they zone in flood area.. I will lose my home of 11 years ..

will williams
October 31, 2013 at 12:55 pm

I am all on board for pending flood insurance and while we are at it let's do the same with health insurance. Why should I pay for other's health care?

Jessie Fragmin
September 24, 2013 at 10:03 am

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Don Hill
September 23, 2013 at 11:31 am

We have a property here in Georgia. We live about 150 yards from a small (6" deep and 3' wide) stream. We were mapped into a Flood Hazxard "A" zone and have been paying 375 per year...until this year. Our rates jumped to 4900 per year. With only 25k equity, my wife and I are making the decision to walk away from the home. Not of choice, but of necessity. We simply cannot afford for our mortgage payment to double. This would cost us (IF the NFIP rates reamin constant) over 100,000 over the life of the mortgage. It simply makes no financial sense to keep the home.

Scott
September 18, 2013 at 4:33 pm

The annual increases for previously subsidized pre-FIRM properties has mostly be publizied as 25% annually until the current non-subsidized rates are reached.

However, I recently learned this 25% increase will be in addtion to a regular rate increase anticipated at 19%. This will result in annual increase of 44%.

Apparently, BW-12 included a component to pay the debt incurred from borrowing $21b from the US Treasurey. Yet the NFIP was already in debt nearly $80b prior to Hurricane Sandy's impact. Thus... there are two debts to be repaid here. Hence the 25% & 14% incrases.

This is prombting a rush of communities to participate in the Community Rating System (CRS) that offers communities rate discounts for going above and beyound the basic requirements.

Problem is, the NFIP is a revenue-nutural program. So these discounts enjoyed by CRS participating communities will create a negative balance, which will be recovered by even highter increases to non-CRS communities.

George
September 14, 2013 at 1:18 pm

There is no doubt that this incredibly irresponsible legislation is going to have a devastating effect on the already fragile coastal economy across the country (and on the real estate market in particular).

Over the last several weeks my family and I have been in the process of preparing to close on a modest home in coastal North Carolina, and upon learning that the mandatory flood insurance for the maximum $250,000 coverage provided by the NFIP was going to increase from approximately $550/year to an incredible $15,400/year (and possibly more) we are now almost certainly going to back out of the contract - thank goodness we are still in our due diligence period).

I have since found out that in the last month alone, the real estate agency we are dealing with has had three other contracts terminated because of this.

You don't have to be an economist to see what will happen (and has already started to happen):
1) real estate values in these areas will again collapse
2) businesses in these areas will fail because they also can't afford these policy premiums, and since their customers won't or can't afford them either, they won't have any business anyway.
3)Those already owning homes faced with tremendous increases in premiums (often higher than their mortgage payments!) will be unable to sell their homes and face foreclosure.
4) The trickle effects of this government introduced shock to the economy will extend beyond coastal areas as unemployment rates tick up, real estate values fall, and tax revenues to these economies contract again.

And as for Kienbien's above post, while I agree with you that taxpayers shouldn't bear others risk (although that seems to be something our current administration really excels at), I think if you do a little more research on the history of the NFIP you will see that that is not at all what is happening here.

Imagine owning a home worth $250,000 with a 1 percent per year risk of a flood related claim, and being FORCED by the government to buy insurance that costs $15,000/year. Does that sound like a re-allocation of actuarial risk to those actually in the "risk pool", or does it sound more like legislators engaging in an incredibly stupid effort (Maxine Waters now admits as much) to correct years of tremendous government mismanagement by throwing it on the backs of hard-working coastal inhabitants who have had almost no warning or choice in the matter?

Oh well, maybe this will help sell more mountain homes -- until the government figures out a way to tax the view!

Darren Brandes
September 13, 2013 at 6:19 pm

On behalf of the millions of homeowners like me, thank you for your twenty-twenty hindsight.

what good is flood insurance if people can no longer afford it? People like me are now stuck with not being able to pay their premiums required by their mortgages and not being able to sell their homes because they've just become worthless.

Kienbien
September 13, 2013 at 3:19 pm

" a decision-maker somewhere with some common sense steps up to try to find a better way to address the flood insurance problem"?

Really?

Common sense would be to NOT buy a home in an area at risk of flooding. Rates need to reflect the risk of living in such areas and the premiums and damage aversion should not be born by tax payers. You live there, you bear the risk. Just be thankful that you were subsidized the last 12 years.

Darren Brandes
September 13, 2013 at 11:11 am

I live in Pinellas County, Florida, the county most affected by this legislation in the nation. I live in a pre-FIRM home located miles from the beach but near an inland canal. I currently pay $1,700 per year for the flood insurance policy for my $200k home. My mortgage company requires me to maintain a flood policy. It is my understanding that the current subsidized flood insurance rates for pre-FIRM homes are grandfathered in until they are sold to new owners or the flood policy in place on July 6, 2012 lapses. Well, I was shopping homeowners policies last year and found a much more affordable policy. I ended up moving all my policies over to the new company. I signed all the new paperwork and filed cancellation letters on my old policies in late June, 2012 (before Biggert-Waters even existed)for an effective date of July 16th. Between the time I did all the paperwork for the rollover of my policies and the time they went into effect three weeks later, the Biggert-Waters bill was voted on, signed and was immediately put into effect. Because of this, I am excluded from the grandfathering provision for my flood insurance rates. Instead of paying $1700, I am now required to pay $10,000 at my next renewal (based on the just released FEMA rates). I simply can't afford this. I told my wife to start packing up the house. We are going to try to sell it after living there for 12 years. So much for a retirement home. I don't think I will be able to find any buyers for this house if it comes with a $10,000 per year flood insurance bill. If I can't sell it, I am just going to have to walk away from it and let it go into foreclosure. After the bank forecloses and unloads the house for next to nothing, they will sue me for deficiency. When that happens I will file bankruptcy. There are close to 50,000 home owners in Pinellas county that will be in the same position as me soon. The skyrocketing flood premiums will drive home values here into the ground. That will result in Pinellas County losing a ton of property tax revenue, possibly putting the county into bankruptcy. I sure hope a decision-maker somewhere with some common sense steps up to try to find a better way to address the flood insurance problem. This solution will do far more damage than good.