Flood of Risk

REVIEW SUMMARY
What. National Flood Insurance Program extended again and again.
Issue. Program may lapse again at peak of hurricane season.
Impact. Real estate deals are on ice and borrowers at risk if extensions not retroactive.
By the Numbers. Click here to review flood insurance policies along the Gulf Coast.

Real estate deals and bank loans are tough enough these days. Now throw in contracts in jeopardy because subsidized federal flood insurance averaging $570 a year can't be relied upon.

Privately-placed flood insurance can cost thousands of dollars more because of the difficulty of assessing risk, the magnitude of potential claims and charging actuarially sound rates.

That's not a good option for property owners in a flood zone with a federally-backed mortgage — except when it's the only option.

On June 30, when the Senate voted to extend the 42-year old National Flood Insurance Program to Sept. 30, the program had been lapsed for a full month.

It was the third time so far this year, and the longest in 2010 that the program went into a so-called “hiatus” before being extended. Another stalled bill would have extended it for six months.

“If in October they haven't renewed it, we'll have the same problem again,” says Don Pellegrino, an agent with Florida Executive Realty covering the Tampa Bay market.

Pellegrino's remarks represent a common refrain of frustration from real estate industry professionals, including title companies, mortgage brokers and bankers, not to mention their clients caught in the middle.

Roger Gillespie is a commercial and residential associate with Re/max Preferred in St. Pete Beach, where he says, “Everything I deal with is in a flood zone. Gillespie also utters what's on many minds, “What we don't need is something to stall the recovery.”

Gillespie and St. Pete Beach resident Pellegrino have sympathy from their city commissioner, Marvin Shavlan.

In a June 24 email to city lobbyist Jim Davenport, Shavlan writes, “I don't think extending this retroactively helps much because in the mean time (sic) it's pretty much impossible to sell anything in a 100 year flood zone unless it's a cash deal. Our economy has enough problems and this only makes it worse, what are our congressional representatives thinking?”

But the timing of the hiatus could hardly have been worse with the onset of what is projected to be a more active hurricane season starting the same day flood insurance became unavailable.

The interruptions become problems for homebuyers needing to renew policies that were not renewed prior to the end of the 30-day grace period, homebuyers who must purchase flood insurance to get a mortgage from federally regulated lenders, and property owners refinancing existing mortgages who must buy or renew coverage.

Doug Stevens, vice president of Stewart Title in Fort Myers, has seen and heard the war stories over the past weeks. “It was havoc,” he says. “It was a standstill in the industry. I was hearing it from mortgage brokers across the board. There were deals that weren't able to close.” Stevens adds, “They were scrambling and trying to be really creative.”

More than a bad habit

There are 622,068 federal flood insurance policies in-force in the eight Gulf Coast counties from Pasco to Collier. That's 29% of the statewide total of more than 2.1 million policies insuring $473 billion in buildings and contents.

Lee and Pinellas counties lead the pack in the region with nearly 150,000 federal flood policies each. Florida has by far the biggest share of the 5.6 million policies held across the U.S. with Texas having the second most with less than 700,000.

There have been 11 reauthorizations of the program since 2002 and on four occasions it was allowed to lapse for extended periods.

It's come to the point of being more than a just a bad habit of congressional lawmakers. When a home trades hands, a host of tradesmen, professionals, pool suppliers, furniture companies, building officials and others get to work.

Gulf Coast real estate owners and lenders also now have to contend with the prospect of property values and deals being upset by oil spill worries.

As it is, the anxiety this time over flood insurance was compounded as the realtors' lobby was frantically trying to get the June 30 closing date for the homebuyer tax credit extended, also to Sept. 30.

A nationwide “Call for Action” by the National Association of Realtors urging “a lasting NFIP extension” yielded 250,000 letters to members of Congress last month.

With as many as 180,000 closings at stake nationwide, real estate folks breathed a collective sigh of relief when that measure squeaked through Congress just before the end of the month. The NAR estimated 14,830 deals in Florida would not have made the June 30 deadline.

Fortunately, for more than just borrowers and lenders, each time the program lapsed Congress saw fit to make the extension retroactive to the cutoff date.

To date, that provision has been automatic. But with a growing federal debt crisis it's enough to unnerve real estate interests and add more risk to a fragile market.

The NAR forecasts a “notable decline” for existing home sales in July and August and that the national median home price will only appreciate 4% cumulatively over the next two years.

Old problem, new delays

Extensions are becoming an-all-too-frequent event in Congress this year with at least one more round to go.

In fact, the “Flood Insurance Reform Act of 2010” (H.R. 5114) hasn't been acted on by Congress since May 26. The bill attempts to revamp the money-losing program to make it more actuarially sound and extends it through 2015.

The Act would require mortgage lenders, who make federally related mortgages, to include specific information about the availability of flood insurance in each good faith estimate. As of May, the program is currently $18.75 billion in debt and allowed to borrow up to $20.725 billion this fiscal year with the president's approval.

Don't hold your breath for a major extension. H.R. 5114 has an ancestor dating to the first Clinton administration: the “National Flood Insurance Reform Act of 1994.” In part, it calls for a study of the economic effects of increasing the subsidized rates to actuarially sound rates.

Flood insurance would “rise substantially,” the study concluded, for structures exposed to considerable flood risk, meaning those built below the base flood elevation. Within a year, the average premiums for such structures “would likely increase from $585 to about $2,000 and remain in the $1,800 to $2,000 range over the next 25 years,” if the majority of the premium subsidy were eliminated.

Premiums for structures with low flood risks, the study predicted, would decrease somewhat because actuarial premiums were less than subsidized premiums.

In late June, while legislation to extend the flood program was being held hostage by Senate Democrats piggy-backing it onto the failed bill to extend the unrelated issue of unemployment insurance, roughly 1,400 closings a day were being held up around the country according to the National Association of Realtors.

At least 10% of those delayed closings were Florida transactions according to John Sebree, vice president of public policy for the Florida Association of Realtors.

Workarounds limited

The situation could have been worse had some mortgage lenders not gotten creative with workarounds. Some of those strategies, at least, came with some encouragement by the federal Office of the Comptroller of the Currency.

The agency, which is the administrator of national banks, issued a bulletin June 9 to bank officers offering guidance to banks about how to deal with the lapse problem. The bulletin, while offering some cautions, states that banks, at their discretion, may continue to make loans for property in special flood hazard areas without flood insurance when federal flood insurance is not available.

That was news to a number of realtors and realtor association executives when informed about the bulletin.

“That's the first I've heard this,” says Paula Hellenbrand, past president of the Cape Coral Association of Realtors. Hellenbrand says she had some issues with clients' flood insurance, but was able to get the seller's policy assigned to the buyer, a permissible practice.

Nancy Dunning, the association's executive was unaware of it too until first hearing it July 1. And also in the dark were Ann Guiberson, head of the Pinellas Realtor Organization and her counterpart with the Sarasota Association of Realtors, Kathy Roberts. Guiberson says she would have liked to have known about the bulletin and gotten the information out to her members.

Randy Mercer, a founding partner with CB Richard Ellis in Fort Myers, says he has heard of banks making exceptions in the flood insurance requirements.

Mercer, speaking before the extension was approved, believes banks are willing to roll the dice in some situations because, “It's everyone's opinion that Congress will probably fund that since we're coming into the storms season.” However, Mercer says, “It does cause some anxiety when a government program is hanging out there.”

Banker Doug Thrasher, senior vice president of Florida Gulf Bank in Fort Myers, says the bank is aware of the bulletin, but was able to move ahead with just a few loans during the hiatus.

Thrasher points out that for the vast majority of loans sold into the secondary market, “ ... the securitization says insurances have to be in place and in force.” That being the case, and with real estate agents and their clients unaware of the flexibility offered by the guidance, its benefits are limited.

Mercer sums up the frustration in the real estate industry knowing that Congress is adding to real estate risk by wrangling over flood insurance, saying, “It's like saying everyone has to wear a white shirt, but we're not going to provide white shirts.”