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Congressional Flood Insurance Proposals Will Hinder Houston Real Estate Investment
Today seems like an awfully good day to report the sweeping flood insurance changes that the U.S. Congress has passed out of Committee, given Houston's non-stop rain in the past 48 hours.
Houston real estate investors have good reason to be concerned about the flood insurance reform bills recently considered by the 109th Congress. Based on both U.S. House and Senate proposals, investors may be unable to purchase federally subsidized flood insurance on high-risk, flood-prone property.
Houston property values are certain to decrease because of this legislation - and not just flooded properties. As the cost of owning property increases for investors in damaged areas, investors are likely to pay less and remodel fewer homes.
As investment money incrementally leaves a region, so does revitalization, hurting neighborhood values as well.
One investor already considered abandoning all purchases in flood areas. "I already spend a lot of money on fixing properties in flooded neighborhoods. This just adds to my costs."
THE LEGISLATION
In March, the House Committee on Financial Services passed H. B. 4973, introduced by Rep. Richard Baker (R-LA) and Ranking Member Barney Frank (D-MA). The Senate Committee on Banking, Housing, and Urban Affairs passed its own Flood Insurance bill in May. Senate Banking Chairman Richard Shelby (R-AL) sponsored the Flood Insurance Reform and Modernization Act of 2006.
These flood insurance proposals come in the wake of a financially disastrous 2005 hurricane season and in anticipation of more hurricane/flood damage this year.
Hurricanes Katrina and Rita cost the National Flood Insurance Program (NFIP) $23 billion, according to The Wall Street Journal, an amount more than NFIP's total paid claims since the program began in 1968. Consequently, NFIP is "bankrupt," Sen. Shelby declared.
The government established NFIP, in conjunction with the National Flood Insurance Act, so that it could assist with flood damage. Before then, insurance companies generally didn't cover floods due to high risk.
One measure both bills propose to address the NFIP deficit is to increase NFIP's borrowing limit from the Treasury. In order to cover their contractually obligated expenses, NFIP could borrow up to $20.8 billion. The maximum currently stands at $18.5 billion.
There would also be an increase in certain property premiums, which were not nearly enough to cover the 2005 expenses.
Another measure specified in both bills particularly worrisome to Houston real estate investors is the cessation of federally subsidized flood insurance for non-primary residences (such as vacation and second homes) and businesses.
A spokesperson from Rep. Jack Reed's (D-RI) office told HoustonRealNews that the House bill would phase out such properties over four years at 25 percent a year.
The Senate's more expansive and stricter bill, though, includes phasing out property that has undergone repeated damage.
On May 26, New Orleans' The Times-Picayune reported, "Shelby's bill would immediately require owners of vacation homes, investment property and businesses to pay fair market rates for their flood insurance. The bill would phase out subsidies for homes whose flood damage exceeds their fair market value and so-called "repetitive loss" properties that have filed four or more claims." The House bill "...only requires a study of that issue."
[Editor's Note: FEMA already has implemented such a program in Harris County as we reported in December.]
Sen. Shelby justified the need for stronger reforms in the Senate's Feb. 2 hearing report. He argued that the current NFIP program encourages development in risky, low-lying areas, which, even though is beneficial for developers, ultimately becomes expensive to taxpayers.
Moreover, Andrew Gray, spokesperson for Sen. Shelby, told HoustonRealNews that the bill would eventually eliminate all subsidies.
LOCAL INSURANCE AGENT QUESTIONS
Although some local insurance agents said they have not followed the proposals closely enough to comment on their impact, the National Association of Professional Insurance Agents told PRNewswire in March that they are glad to see changes made to the current flood insurance law.
Houston insurance agent John Atkinson, Jr. of Atkinson Brothers Agency, though, hopes Congress doesn't phase out all the non-primary properties.
In an e-mail, the knowledgeable investor agent recognized that there is a need to reform NFIP. But,"Congress has the responsibility to reduce operating costs of the program before considering risking the many unintended consequences of the proposed sweeping changes," he wrote.
"...[A]ny attempt to 'redistribute the burden' that may arise solely from political posturing should be opposed and opposed very vigorously."
One possible method of reducing cost, Atkinson proposed, is to allow blanket flood coverage which would insure multiple properties on just one policy.
Doing so would allow for one annual deductible instead of deductibles per loss. Atkinson argues that this would encourage investors to buy flood insurance on their "entire inventories, since their handling costs could be significantly reduced and...uninsured flood losses could be appropriately budgeted."
The full House and Senate will convene to discuss the new proposals. Nevertheless, the bills will significantly affect the real estate investment market.
Although if insurance agents like Mr. Atkinson are heard in D.C., certain Houston neighborhoods which require private redevelopment will not lose Congressional support.
Don't hold your breath.### Elyse Bell has written for HoustonRealNews and The Cincinnati Enquirer as well as some niche publications. She earned a Master's Degree from Harvard University and pursued further Graduate studies in top institutions in the Northeast.
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