HOUSINGNEWS REPORT
REAL ESTATE INSURANCE: FENDING OFF DISASTER IN A CHANGING WORLD
However, this ability to borrow more is only possible because in October 2017 Congress cancelled $16 billion in NFIP debt. To make matters more complex, the NFIP cannot raise premiums to the point where the program is self- sustaining. In 2012 Congress passed the Biggert-Waters Flood Insurance Reform Act and one result was higher costs for coverage. In the case of one Florida homeowner, the premium for a $300,000 property went from $1,900 annually to more than $49,000. In 2014, bowing to political
Affordability Act, which limited annual premium increases to a still-hefty 18 percent. The program today includes roughly 5.1 million homes in some 22,000 communities. Residential coverage is limited to $250,000 for structural damage plus $100,000 for contents. The number of communities and the volume of properties is so great that the government cannot allow the NFIP to lapse. To do so would end coverage valued at $1.2 trillion. Lenders could turn to force-placed insurance if the NFIP is shuttered, but what private-sector companies
have the ability to offer the necessary coverage? How would borrowers pay market-rate premiums? Lenders might foreclose but a sudden and massive number of properties for sale would crush shoreline values. Meanwhile, mortgage investors would want their payments, thus setting off massive problems with Fannie Mae, Freddie Mac and the secondary market. “If a prospective homeowner has secured a mortgage, the lender is going to insist on the home having property insurance coverage so as to protect the lender’s financial stake,” says Michael Barry of the Insurance Information Institute. “I have not heard of instances in which a home was foreclosed upon because of an inability to get insurance coverage.” The NFIP is now scheduled to expire on Nov. 30. What happens then? No one really knows but some strategies are clear.
pressure, Congress passed the Homeowners Flood Insurance
“Flood insurance had long been considered an untouchable risk by private insurers because they did not have a reliable way of measuring flood risk. In recent years insurers have become increasingly comfortable with using sophisticated models to underwrite insurance risk, and modeling firms are getting better at predicting flood risk.”
INSURANCE INFORMATION INSTITUTE
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OCT 2018 | ATTOM DATA SOLUTIONS
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