Hello folks
Ordinarily, I write updates for homeowners of Sandy damaged homes in Staten Island
who are interested in government buyouts. But flood insurance has become a worrisome and controversial topic lately. I want many more folks in our coastal NYC communities to be aware of the pending changes in flood insurance coverage that will hit them in the wallet.
who are interested in government buyouts. But flood insurance has become a worrisome and controversial topic lately. I want many more folks in our coastal NYC communities to be aware of the pending changes in flood insurance coverage that will hit them in the wallet.
These changes will impact at least 60,000 people in here NYC. Please forward to anyone who you believe could benefit from this information. Source information and relevant links are found at the end of this email.
If you or any homeowners wish to be added to our distribution list, let me know.
Alex Dubrovsky
dubroval@gmail.com
Background
If the changes planned for the National Flood Insurance Program are implemented as they are written, they could spell disaster for coastal communities around the US. The flood insurance program is undergoing some of the biggest changes in its 45 year history. At the center of it all is the Biggert-Waters Flood Insurance Reform and Modernization Act that was passed and signed into law last year. The reforms require that the cost of flood insurance be based on actual risk factors and remove federal subsidies that make this coverage affordable. It also takes away grandfathering. That means that people who have done nothing wrong will be forced to pay much higher flood insurance rates for the same coverage.
Here in NYC we are getting smacked by the confluence of three separate things – the devastation of Sandy, the FEMA mapping changes, and the Biggert-Waters phase-out of subsidies. The result will make it very expensive for many of us to buy coverage. Banks require this coverage for people with mortgages in flood zone coastal neighborhoods. Many of us will find that the unaffordable insurance will prevent the sale of properties to buyers who could not afford it either. The end result could really be catastrophic for our community. These potential increases are not well understood here in NY and will catch lots of people unprepared.
This is an issue that has gotten national attention very quickly. It is a big deal according to George Kasimos of Toms River NJ, who runs a group called STOP FEMA NOW. His group is dedicated to fighting the new maps and to keeping flood insurance rates affordable. He said that “A lot of people are still trying to rebuild, and they still don’t understand that even though they are rebuilding, they may not be able to afford it when they get the new flood insurance bills. A lot of people still don’t know.” They are also fighting the rate increases in Louisiana, according to Michael Hecht of the Greater New Orleans Regional Economic Alliance. He supports the federal Cassidy Amendment (now pending) to delay the new rate hikes for a year. He says that the new maps for Rockaways, Red Hook, Lower Manhattan, and Staten Island are similar to that of FEMA maps for coastal Louisiana. The new maps and Biggert-Waters could make all coastal properties effectively uninsurable because of the skyrocketing premiums. Flood Insurance is important to protect us from the unthinkable. If legislation makes it too expensive for working people to afford, it becomes useless.
The Details
Recent changes to the National Flood Insurance Program (NFIP) will cost us coastal residents a lot of money. The risk of flooding is directly tied to coastal storms, to sea level rise, and more indirectly to climate change. It also has to do with the specifics of each property (elevation, distance from water, etc.) This risk will be communicated to homeowners by charging actuarial (risk-based) flood insurance rates for their coastal homes. Our low lying coastal neighborhoods in NYC are more risky to insure and we will see skyrocketing increases in premiums. (This applies to coastal homeowners with mortgages and to folks who took recovery money from federal sources, but did nothing to mitigate the risk of flooding. Folks who have their homes elevated, or rebuilt, or acquired by NYC Build It Back program will not have this problem. If you have a Sandy damaged home in NYC but have not applied for NYC Build It Back, be sure to do so before September 30th. Call 311 or do it online – takes 5 minutes.)
BW-12
The Biggert-Waters Flood Insurance Reform Act (BW-12) was passed in July of 2012 to reauthorize and reform the National Flood Insurance Program (NFIP) for another five years. It was meant to put the bankrupt National Flood Insurance Program on more sound financial footing. This is done by getting rid of subsidies, discounts, and grandfather provisions that have kept this program affordable for many homeowners for many years. These subsidies also allowed building in the floodplain (aka Zone A in NYC) without communicating the true risk or cost to home owners.
The National Flood Insurance Program (NFIP) is getting killed by the claims brought for Hurricanes Katrina, Rita, Wilma in 2005 and now by Sandy. These storms have saddled the NFIP with about $30 billion in debt to Treasury (a debt that will never be repaid, in my opinion.) All federal taxpayers are one the hook for this since the Treasury writes a check when the NFIP cannot make payments. The point of BW-12 reforms is to have the NFIP to reach “actuarial stability” in which cost and risk are at the correct equilibrium for all policyholders. BLAH, BLAH, BLAH…The plan is for NFIP to pay off its debt to taxpayers and reduce the need for future bailouts. Also it is supposed to educate us, ignorant masses, about the true risk of flood damage, which is higher than our current subsidized rates imply. If we do not understand the hazards, we will just continue to live and build in flood prone zones. These BW-12 reforms may help the viability of the NFIP, but will lead to harmful consequences for policyholders in coastal neighborhoods. Let’s briefly discuss how all this began.
NFIP history
Congress created NFIP in 1968 so that property owners in participating communities could purchase insurance against loss due to flooding. This program was also intended to reduce future flood damage. Congress essentially made a deal with local governments, which can be summarized as follows:
1) Congress agreed to provide affordable (subsidized) flood insurance for properties that are already in harm’s way (100-year flood plains, coastal areas, the Zones A & V in NYC).
2) Communities wishing to have flood insurance available agreed to regulate new construction so that buildings would not suffer damage in a flood of a certain magnitude. The benchmark flood was defined as the flood that has a 1% chance of occurring in any year. That 1% annual chance flood is also known as the 100-year flood.
Communities agreed also to enforce the 50% rule. It meant that they would treat substantial damage or substantial improvement as new construction when it came to preventing future flood damage. That is the reason why NYC’s floodplain manager (Department of Buildings) requires that substantially damaged buildings be subject to new construction building codes. That means they need to be elevated to the FEMA’s BFE (Base Flood Elevation) and have their basements filled.
Communities agreed also to enforce the 50% rule. It meant that they would treat substantial damage or substantial improvement as new construction when it came to preventing future flood damage. That is the reason why NYC’s floodplain manager (Department of Buildings) requires that substantially damaged buildings be subject to new construction building codes. That means they need to be elevated to the FEMA’s BFE (Base Flood Elevation) and have their basements filled.
The huge NFIP debt to the Treasury has resulted in part from the program’s inability to charge premiums that are sufficient to build up the capital that most private insurers have to offset losses in a bad year. In fact, NFIP has lost money in five of the past nine years. In coastal NYC, we pay these subsidized rates that helped get NFIP in trouble. Per FEMA, a subsidized policy is one that does not pay the full actuarial rate and is not reflective of the true risk of flood to that property. Homes located in a high risk flood zone (i.e., zones beginning with an “A” or “V”) and built before the first flood insurance rate map became effective, may currently be receiving subsidized flood Insurance premium rates. That’s definitely us.
NFIP has been the only game in town since the collapse of the private insurance market. The private market for residential flood insurance is very small and focuses on fat cat homes with values over $1 million.
When working people buy flood insurance, the policy is sold by an insurance agent, but the risk is underwritten by NFIP, and thus by the taxpayers. The upper limit of coverage is typically $250,000. The insurance agents collect a 30% annual commission for selling this policy. Insurance agents don’t like selling this coverage. It is not very lucrative and they can’t offer business interruption coverage or rental assistance as part of the policy.
I heard it through the grapevine - this will hurt a bit
I heard that FEMA officials expected the BW-12 reforms to cause widespread “consternation.” It will do more than that. Without significant modifications (to timing and amounts of the increases) there will be problems. I am not talking about economic impact of higher rates on banks, real estate agents, and insurance agents. This is social and political stuff which should be of concern to government officials and to law enforcement. These skyrocketing premiums could cause chaos, social disruption, and possibly protests or rioting by outraged homeowners. How should people react to being forced out of their homes by unaffordable premiums? If the political process fails them (and it has so far) they may take matters into their own hands. We have never really had such a thing happen in this country on a large scale. The NFIP was never meant to be a money maker. Right now, the BW-12 is poised to become a reform act that ultimately creates more problems than it solves.
Smacking FEMA and NFIP around in public - you will get your chance
The new rates will not just happen all at once. The City and FEMA will have to hold public hearings. There will be time to berate FEMA and NFIP over the lack of affordability and the steep increases. The brunt of this will be borne by middle class people and retirees - who are least able to afford this. Mayor Bloomberg has already raised the issue of affordability to FEMA. The House and the Senate have each made several failed attempts to slow down or stop the increases. Congress is sick and tired of taxpayer handouts. It wants a financially stable NFIP that sends accurate risk signals to those living in flood prone areas. Congress wants NFIP to pay back the $30 billion owed to the US Treasury. FEMA has yet to decide how exactly to implement these increases. However, there is little doubt that they are coming.
Once NYC adopts the new FEMA flood maps in 2014, costal flood insurance premiums will skyrocket. As example, they would jump from something like $2,100 per year to $10,300 per year and phased in over five years for existing policy holders. This would be the rate for my house, a Depression Era bungalow located in Great Kills, Staten Island. My house is located in FEMA flood zone AE and is 5 feet below Base Flood Elevation. It will not be elevated and does not have a basement. The new rates are already published on the NFIP website (but are really meant for insurance agents who sell flood policies.)
Trigger Event - don't pull the trigger
This stuff will also impact people who do not have a mortgage. If they ever try to sell their house, it becomes an NFIP “trigger event” – which is bad news. They have to disclose the NFIP coverage requirement to potential buyers who will take out a mortgage. With a trigger event, there is no phase in period for the increases. The premiums become actuarially risk-based right away. No rational working person would buy such a house. In real estate sales, material facts like NFIP requirements must be disclosed to the buyer. The mortgage company or a bank would have to notify buyers or mortgage holders as well. The BW-12 reforms provide a very strong incentive for them to do so. More about that later.
The Bite
Specifics of the BW-12 changes for coastal Special Flood Hazard Areas (SFHAs)
1) Existing NFIP policyholders will have their rates increased up to 20% per year, starting in 2014.
The BW-12 states that subsidized primary residences will maintain their current rates UNLESS the property is sold or the policy lapses, or a new policy is purchased, or flood maps in the community are updated. That last part will cause our flood insurance rates to skyrocket. There is no grandfathering of policies when the community flood maps change, which just happened in June 2013 in NYC. (FEMA was revising coastal NYC flood maps independently of Sandy. These things happened at about the same time by coincidence. Many of my neighbors think otherwise. I do not believe that there are FEMA conspiracies to destroy coastal communities. My wife who is helping me type this disagrees bitterly.)
2) The following categories of properties will see increases of 25% per year until rates accurately reflect risk:
• Any subsidized business property in a SFHA will see this increase in October 2013.
• “Substantially damaged” or “improved” structures will also be subject to the 25% annual increase.
• “Severe repetitive loss” properties whose flood-related damages result from at least four separate claims (each exceeding $5,000) totaling over $20,000.
3) Every new policy purchased after July 6, 2012 (BW enactment date) will begin at immediate actuarial rates. I don’t know of many working people who can pay an extra $900/month, which is not even tax deductible.
Flood insurance premium increases will be largest for subsidized properties in SFHAs with very low elevations. That describes our coastal neighborhoods in Staten Island (with natural elevation of 5-7 feet above sea level). These premium increases will put a huge strain on working people and on retirees in our coastal communities. We are not doctors or business-owners living in the Hamptons or in Manhattan Beach.
How it kicks us in the posterior region already - rhymes with "pain in the **s"
I have already seen some of BW-12’s effects in my own community of Great Kills, Staten Island. A neighbor paid a $4,000 annual premium for just $60,000 of building/structure only coverage. Another neighbor paid $1200 for $40,000 of coverage for structure only. This is gangster money territory that should outrage any home owner. Please keep in mind that the actual payout of covered amounts will be much lower than the face value of the policy. Our $250,000 policy only covered $89,000 for $170,000 worth of needed repairs. The small print will get you every time, but NFIP is the only game in town. Skyrocketing premiums will force many people to either give up the flood coverage or to give up living in their properties.
Misery loves company – why I enjoy watching my bank break into a sweat over my problems.
Home owners are required to carry flood insurance by their mortgage company or bank. FEMA determined that just about half of the homes in coastal SFHAs actually carry the mandated flood insurance. That contributes to the poor financial state of the NFIP. The BW-12 reform imposes a fine of $2000 per violation to an institution (a bank or mortgage company). The previous violation cap of $100,000 per year is removed. If an institution has 1,000 SFHA households without the required coverage, it will pay a fine of $2 million to the National Flood Insurance Program. Institutions have a strong incentive to make sure everybody carries flood insurance to avoid these penalties. Property owners who fail to purchase an NFIP policy, may be automatically put in to “force placed” insurance, primarily through private flood insurance but also through the NFIP’s Mortgage Portfolio Protection Program (MPPP). Policyholders in this program usually pay more for flood coverage. A home owner is damned if they do and damned if they don’t buy flood insurance.
Oops, the Feds did it again – unintended consequences. (I'm from the government and I am here to help you)
There are unintended consequences of these reforms. Some people will walk away from their mortgage(s) or get foreclosed. Some people who voluntarily buy flood policies will likely drop flood coverage. One result of changing property ownership will be what has been called the “gentrification of the coast”. When low-income and middle–class families can no longer afford their properties in coastal and oceanfront locations, these properties will be purchased by the wealthy who can afford the insurance costs. Over time, high NFIP premiums will cause so many middle class families to relocate, that the desirable waterfront living becomes exclusive to the wealthy. Another possible outcome is a “hollowing out” of less-desirable communities. These are working class communities in flood prone zones that are not appealing to the wealthy. When insurance premiums become unaffordable in these communities, it becomes a vicious circle. Homeowners are unlikely to be able to sell because those that can afford the home do not want to live there, and those that might want to live there can no longer afford it.
The problems of BW-12 reforms and the gentrification or hollowing out of communities are quite real. Here are some of them per the Watershed Watch non-profit organization in Norfolk:
• Real estate sales could become very difficult when full actuarial rates are required at the time of sale.
• Middle-income and low-income families that cannot afford their insurance may be forced to sell, and if they cannot find a buyer, could default on their mortgage.
• Middle and lower income families may be forced out of homes or businesses that have been in their families for generations.
• After buying up beachfront properties from the middle class, the wealthy may build hard structures to protect their properties that will ultimately destroy the public beach, further limiting the public’s ability to access the oceanfront.
• Property values in less desirable areas will decline, and with them the tax revenues and community services.
• Two types of waterfront communities may emerge – those exclusive to the wealthy and those plagued by suburban decay and lack of resources.
Self-inflicted wounds
The impact of the drop in coverage brought on by BW-12 will also be harmful to the NFIP. Floodplain managers predict that even with new enforcement provisions from BW-12, more people will drop their coverage as a result of rate increases. The NFIP may lose much of its small base of voluntary policyholders, which are needed to sustain the program. If disaster hits when so many property owners have let their coverage lapse, the NFIP will have fewer payouts but many more people will seek federal disaster assistance – exactly what the NFIP intended to reduce. The NFIP will be unable to repay the $30 billion outstanding debt to Treasury or establish a reserve fund for future claims. Various amendments to BW-12 have already been proposed, but none have passed both the House and Senate.
The coastal rumble – bring your best game y’all
The fight to delay portions of BW-12 is a federal one. It is taking place in Washington and is attracting national interest. Several well-funded special interests have joined the fight. OK, you can now open the three attached letters from the special interests
http://www.larealtors.org/pdf/
http://www.larealtors.org/pdf/
http://www.larealtors.org/pdf/
Folks, if you only look at one link, this should be the one: http://gnoinc.org/uploads/
The epicenter of the fight is in New Orleans, Louisiana. Let’s recall that New Orleans sits BELOW sea level. Much of the Katrina damage in 2005 (1000+ deaths, $17 billion in NFIP claims) happened in New Orleans metro area. Louisiana gets more in NFIP claim payouts than any other state. It is no surprise that key legislative changes have come from several Louisiana politicians, including Congressman Bill Cassidy and Senator Mary Landrieu. Their legislation has not yet become law. However, it is attached to Fiscal Year 2014 Homeland Security Appropriations bill in both the House and the Senate. It should get passed eventually. It will delay implementation of Section 207 in the Biggert-Waters of one year - by keeping existing pricing in place. This would only help existing policy holders who are impacted by FEMA mapping changes. All the other BW-12 changes are going into effect.
Our man in Washington is earning his keep.
Our own Congressman Mike Grimm (R-NY) co-sponsored this key legislation. He issued the following statement: “There are Staten Islanders who have lost everything in Superstorm Sandy, with years to go before their lives return to normal. Now they are up against a tremendous flood insurance rate hike that will only victimize them further. By delaying the rate hikes mandated by Section 207 of Biggert-Waters, we can provide a window of respite for many struggling to rebuild, while Congress works toward a solution that eases the burden on homeowners and keeps flood insurance affordable for those who need it most.”
Many thanks for that Congressman Grimm. I hope it buys us much needed breathing space.
Your mortgage company – uncaring debt collector and now mind reader.
The stakes are big for real estate special interests (and for us homeowners). It takes something extraordinary to unite the interests of bankers, realtors, and builders. I have very little sympathy for institutions that are trying to destroy my credit rating and trying to foreclose on my damaged house. It’s a bit of a joy to decide whether to walk away or to string the bank along with the promises of a buyout that may never come. As a Wall Street person myself, I do recognize that mortgage lenders and banks with real estate portfolios do have a special problem. They do not give a damn about us as individual homeowners in trouble. But there is applicable financial legislation (Dodd-Frank) that requires them to become mind readers (seriously). They are required to document a home owner’s ability to repay a mortgage over the term of the loan. Premiums will skyrocket. People will default on mortgages. How can a bank possibly know if the borrower can afford to rebuild, or to pay the new premiums, or to spend the money to elevate the home? Plus, many more people will be required to buy insurance because of FEMA mapping changes. The banks are in a tough spot and are nervous about it. I am happy to see the banks squirming about our problems, for a change. They will have to report about their mind reading failures in various footnotes and disclosures to the public. Looking forward to that one.
Finally – the end
The overall intent of the Biggert-Waters Act is praise-worthy. It is meant to make NFIP financially sound by sending accurate risk signals into coastal communities. The NFIP needs to provide continued support and assistance for those affected by flooding and by coastal storms. It also needs to reduce post-disaster expenditures and increase awareness of coastal hazards. With the affordability challenges of BW-12, it is important for some reforms to be made to the current provisions in order to be fair to existing policyholders and prevent unintentional social disruption. A reform act that creates more problems than it solves will not accomplish its purpose, and will saddle taxpayers with even more NFIP debt which cannot be repaid. I wanted people to be aware of the potential problems with BW-12 implementation, so our communities can plan for and address future challenges. . The recent “Cassidy/Grimm/Palazzo/
If you have a Sandy damaged home in NYC, but have not applied for NYC Build It Back, be sure to do so before September 30th. Call 311 or do it online – takes 5 minutes.
If you do not want to be on this distribution list, please drop me a line.
Sources:
I borrowed liberally from various sources below. Special thanks to Wetlands Watch in Norfolk, Virginia and to ProPublica for making me aware of the problems and unintended consequences of the BW-12 reform act.
Cassidy/Grimm/Palazzo/Richmond Pass Amendment To Keep Flood Insurance Rates Low
National Flood Insurance Program - Impact of Biggert-Waters 2012 Reform Act
Wetlands Watch, July 2013
Without a Final Map, New York Rebuilds on Uncertain Ground
The Costs of Climate Change and Extreme Weather Are Passing the High-Water Mark
Landrieu inserts controversial flood insurance provision into spending bill
FLOOD INSURANCE - More Information
Needed on Subsidized Properties
Americans for Smart Natural Catastrophe Policy
ASSOCIATION OF STATE FLOODPLAIN MANAGERS, INC.
Flood Insurance Affordability
ASFPM Recommendations to address the impact of NFIP Reform 2012 (BW-12)
On Floods and Rising Insurance Premiums
Focusing on Flood Insurance and on Implementation of Biggert-Waters 2012 Reform Act
STOP FEMA NOW
Summary of Contents Biggert-Waters Flood Insurance Reform Act of 2012
Government Accounting Office
Extension Disaster Education Network
Alexander Dubrovsky, RN
Crescent Beach Buyout Committee
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