Flood Insurance Program, Up for Renewal, Nears Insolvency

Published May 11, 2012

Will the federal government have a National Flood Insurance Program beyond the middle of this summer?

The NFIP was set to expire at the end of May. Shortly before its expiration, President Barack Obama signed a bill extending the program to July 31. A five-year extension that would phase out premium subsidies and open the program to private reinsurance capital passed the House of Representatives in the spring but did not receive Senate approval.

Meanwhile, officials from the Federal Emergency Management Agency asked that the program be extended for two years without any changes.

The Senate Banking Committee’s Economic Policy Subcommittee hosted a May 9 hearing on the need to reform the program. The Senate followed by passing a 30-day extension and the House the 60-day extension that eventually became the bill Obama signed to give legislators more time to iron out details for a longer-term agreement.

‘Not Sustainable’

In written testimony submitted for the hearing by The Heartland Institute’s Center on Finance, Insurance, and Real Estate, Deputy C-FIRE Director R.J. Lehmann contended the program is “not sustainable for an additional two years as it is currently constituted.”

“The U.S. Government Accountability Office placed the NFIP on its list of high-risk federal programs in March 2006, and it has remained there in each successive year,” Lehmann noted. “The program is $17.775 billion in debt and can borrow only $3 billion more from the U.S. Treasury under its currently authorized borrowing authority. Given its debt load, NFIP continues to accrue nearly $1 billion in interest annually and the Congressional Budget Office projected in October 2011 that its current borrowing authority likely will be exhausted by or before 2014.

“Extending NFIP for an additional two years with no major changes would create a strong possibility that FEMA will either need to return to Congress to seek additional borrowing power or that the program will become insolvent.”

Support From Realtors

A long-term extension of the National Flood Insurance Program is critical to provide certainty and avoid further disruptions in real estate markets, testified National Association of Realtors President Moe Veissi.

“As the leading advocate for housing issues, NAR knows that long-term reauthorization of the insurance program is essential to a properly functioning real estate market and would help provide the housing market with the certainty it needs for a meaningful recovery,” said Veissi, broker-owner of Veissi & Associates Inc., in Miami. “We urge Congress to act quickly to reauthorize the NFIP and not let this vital program lapse again. It is critical that homeowners continue to have access to available and affordable flood insurance to protect themselves against losses.”

Since 2008 there have been 17 short-term extensions. NFIP authority twice has been allowed to expire, delaying or cancelling 1,300 real estate transactions each day, according to NAR research. During the June 2010 lapse, NAR survey data estimate that more than 40,000 home sales were stalled.

“Real estate markets are continuing to recover and cannot tolerate the instability of operating the NFIP by stopgap or shut down. This is not a responsible way to run the program, especially since 5.6 million home and business owners in 21,000 communities rely on it,” Veissi said.

Wide Agreement

Problems with flood insurance are widely recognized. There also appears to be wide agreement on solutions among organizations with what are usually different agendas.

Recently, for instance, Matt Gannon of the National Association of Mutual Insurance Companies and Joshua Saks of the National Wildlife Federation jointly wrote a column on the NFIP for the Las Vegas Review-Journal.

They supported reforms proposals introduced in Congress last year allowing the NFIP to purchase reinsurance and phase out bad subsidies. These reforms would allow the NFIP to prepare for future claims while not continuing to fleece taxpayers. In addition, the proposed bill would aid mitigation and environmental protection by requiring accurate flood maps and by discouraging new construction in sensitive coastal and river front habitats.

“These reforms will also ensure that the program no longer encourages harmful development in high-risk areas, which not only puts people and property at risk, but destroys some of the most environmentally sensitive habitats and ecosystems,” Gannon and Saks wrote. “By reducing the development of these areas, we can reduce flood risk while protecting water quality, allowing underground aquifers to refill and provide valuable open space for hunters and anglers.”