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NFIP lapse could delay closings

By Polyana da Costa ·
Wednesday, September 7, 2011
Posted: 1 pm ET

Congress has an array of issues to deal with as it returns from the summer break this week. One topic could have a major impact on real estate closings scheduled for next month.

The National Flood Insurance Program, or NFIP, the only affordable  flood insurance option for those who own homes worth less than $1 million, is set to expire Sept. 30. If lawmakers don't extend the program in time, borrowers in FEMA-designated flood zone areas would  be forced to delay or cancel their mortgage closings until Congress gets to the issue or finds an alternative solution.

Fannie Mae and Freddie Mac require borrowers to have flood insurance to close a loan if the property is in a flood zone area. Most mortgages are sold to Fannie and Freddie and have to meet their requirements. If there is a lapse in the availability of government-sponsored flood insurance, many homebuyers will have to delay or cancel their purchase and more than 1,300 closings a day could be lost, according to the National Association of Realtors, or NAR.

NAR is one of the several real estate organizations lobbying for the extension of the program. The current version of the program expired in 2008 and has been extended nine times since then. Those extensions include five lapses in coverage. The latest, in June 2010, resulted in 47,000 home sales delayed or canceled, according to the NAR.

The House passed a bill in July to extend the program for five years but the Senate has to consider the proposed measure.

The NFIP is run by FEMA and provides insurance to 5.6 million property owners and more than 21,000 communities across the country. The program is far from perfect and has plenty of critics, mostly due to its current loan balance of $18 billion. Hurricane Ivan in 2004 and Hurricane Katrina in 2005 caused more damage than the program was designed to handle. After collecting about $2.3 billion in premiums, the program accumulated about $18 billion in debt to pay for the claims that resulted from those storms. And now it will have to pay for Hurricane Irene's damage.

One of the proposals Congress might consider in coming weeks would raise premiums by as much as 20 percent and another by about 15 percent. While lawmakers need to come up with a long-term solution to this problem, they need to keep in mind the clock is ticking. If they can't revamp the program in time, they need to at least extend the current version of the program to avoid another hit on the already weak housing market.

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