Flood Insurance Lapse Puts Home Owners, Housing at Risk

Thanks to Hurricane Irene, residents from North Carolina to Vermont are dealing with serious property damage. Many are protected through the National Flood Insurance Program but had the hurricane hit a month later, headlines may have been very different.
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Thanks to heavy rainfall and flooding from Hurricane Irene, residents from North Carolina to Vermont this week are dealing with serious property damage. Luckily, many home owners are protected through the National Flood Insurance Program (NFIP). But had the hurricane hit only a month later, this week's headlines may have been very different.

On Sept. 30, 2011, the NFIP, which provides flood insurance to 5.6 million homes and businesses, will expire. If Congress doesn't renew this critical program before Oct. 1, 21,000 communities in the United States will be left without an affordable option to protect themselves from flooding. But it's not just hurricane-prone regions that will be affected. Virtually everyone -- 97% of the U.S. population -- lives in a county that has declared a major flood disaster since 1990, and floods have caused more losses than any other natural disaster in the U.S. over the past century.

Check out the Washington Post's state-by-state damage tally from this weekend's storm alone.

How does it work?

Critics of the NFIP say that the federal government shouldn't be involved in the business of insurance, citing the fact that the program needed a U.S. Treasury loan to pay for damages caused by Hurricane Katrina. But historically, the program has generated enough revenue from premiums to pay for itself or quickly repay a short-term loan with interest to the Treasury. The program's current loan balance of nearly $18 billion is a result of Katrina, a natural disaster that rocked the nation like no other. FEMA has been paying down the loan and compensating taxpayers with interest. But because it can't be assured there'll never be another Katrina, Congress is considering reforms that would generate $4 billion to accelerate the payoff.

Whether or not you believe the government has a place in the insurance biz, the cold, hard reality is that no private-market alternative currently exists for homes valued below $1 million and taxpayers will end up footing the bill via federal disaster assistance if no flood insurance is available.

What happens if it lapses?

Because of debate among lawmakers, the NFIP has lapsed five times in the past three years. A lapse in June 2010 delayed or cancelled about 47,000 home sales, according to the National Association of REALTORS® (NAR). In addition, NAR economists estimate there would be more than 1,300 stalled home sales nationally during each day of a lapse. That's because home buyers in FEMA-designated areas are required to purchase flood insurance in order to get a federally backed mortgage. Without insurance through the NFIP, housing markets will be virtually paralyzed -- buyers in those communities can't get home loans, so sellers can't move their properties.

The outcome of another NFIP lapse could have catastrophic effects -- not only on home owners who need flood insurance, but also on the already fragile American housing market. The U.S. House of Representatives has already passed a five-year extension for this important program. But the Senate hasn't approved the legislation.

Groups like HouseLogic.com and NAR are calling on the Congress to reauthorize the NFIP before Oct. 1, 2011, and prevent another lapse in coverage by asking citizens to write letters to their senators. Now, more than ever, the housing market needs the certainty of long-term access to affordable flood insurance. We can't afford to let the National Flood Insurance Program expire.

To send a letter asking your senator to reauthorize the NFIP for a full five years, click here.

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