Not surprisingly, the National Flood Insurance Program (NFIP) is yet to be renewed in a little over a month. But after seven years of temporary expansion, the mortgage and insurance industries are looking for a change.
“We hope that the new one Congress will reauthorize the program for a long time and make some changes,” said Austin Perez, founder The National Association of Realtors’ senior policy representative in insurance. “But one of the biggest things we’ve been doing is making sure that while the long-term reauthorization package is being worked on, that we’re lobbying Congress not to let the program expire.”
Created by Congress through the National Flood Insurance Act of 1968, the NFIP has received 31 short-term extensions since its last authorization expired in 2017. The program, managed by Federal Emergency Management Agency (FEMA), a public-private partnership between the federal government, the property and casualty insurance industry, states, local officials, lending institutions and property owners.
Under the “write your own” program, the 50 or more private insurance insurers that are part of the NFIP can write flood insurance policies for homeowners and consumers who need flood insurance. Funds to settle other claims are borrowed from Department of Finance. The program is available in more than 22,000 communities across the country, but to be part of the NFIP, communities must adopt and enforce flood damage reduction laws.
Since its inception, the program has received more than 2.6 million applications, and currently protects approximately 4.6 million properties. In 2023 alone, the NFIP received 21,000-plus claims, totaling nearly $1 billion in claims payments.
The impending doom
The main reason the NFIP covers so many areas is that loans financed by government-sponsored enterprises (GSEs) are required to have flood insurance. If the NFIP expires, transactions involving GSE-sponsored loans may still close because the flood insurance requirement is suspended until the NFIP is reauthorized.
Additionally, private insurance companies that are part of the NFIP can still process and pay claims on flood insurance policies as long as the funds to pay these claims are available.
“Many people think that real estate transactions will be disrupted when the NFIP ends, but the truth is, many transactions are going through,” Perez said. “However, the real problem is that properties in flood-prone areas can be sold without flood insurance, which puts buyers at risk.”
Perez said the issue is at the heart of the message NAR is sending to Congress about reauthorizing the bill next month.
Also representing NFIP’s other accreditations is Douglas Heller, NFIP’s director of insurance. Consumer Federation of America (CFA). Like Perez and NAR, he and the CFA have significant concerns about the consequences if the NFIP is allowed to expire.
“There are millions of people in America who rely on flood protection to protect their most valuable asset,” Heller said. “Letting the public flood plan expire and hoping the private market comes in would be an even bigger disaster and cause more problems than the current one, since the private market for flood insurance is generally not financially protected by the public through taxes or insurance agencies.”
When it comes to NFIP reforms, one of the key things trade associations are pushing for is a long-term extension to the NFIP, which experts say will add some certainty to the market. “We need reauthorization for a long time,” Perez said. “Markets don’t do well with this uncertainty – am I going to walk or have flood insurance in 30 days or not?”
Insurers have the same idea.
“We would like to see long-term approval,” said Sean Kent, senior vice president of insurance at FS Insurance Brokers. “If we’re optimistic, I think three years would be the best scenario, but even if we get 12 months – because policies are written in terms of 12 months – that would leave the knowledge that if we write policy today, we’ll have support for it for the next 12 months.”
In addition to a long-term extension, Kent and others want to see changes in how insurance premium rates are determined through the NFIP.
“Typical insurance companies will underwrite based on actuarial risk estimates, so if you live in a high-risk area, you pay more for insurance, but the NFIP doesn’t work that way,” Kent said.
Instead of using actuarial estimates, the NFIP has a risk assessment system to determine a given area’s risk and premium costs. Under this system, homeowners in high flood risk areas typically do not pay as much for their insurance as they would for private insurance. But according to some, this means that NFIP rates are tighter than private rates.
“Their rates are based on location and height, whereas private insurance is specific to the home itself,” said Ted Olsen, vice president at Goosehead Insurance Agency. “Under the NFIP, all the houses on the same street may have the same rates, but under private insurance, a home with a stream in the back yard will have a higher premium than someone else on a street with less risk of flooding.”
$21 billion in debt
Although the NFIP program creates significant cost savings for some homeowners in flood-prone areas, it has created some problems. “The system is $21 billion in debt because there’s no equity in terms of underwriting and how the rates come in,” Kent said.
A recent report published by researchers from the University of Connecticut and the London School of Economics and Political Science supported the financial concerns Kent has about the program.
“A business-as-usual approach to flood mitigation will cause the NFIP debt to grow and culminate in a housing market crash beginning around 2060,” the report said.
This study is very much in line with the 2016 report that came out Freddie Macwhich predicts that $160 billion of the real estate market will drop below sea level by 2050 — and $238 billion by 2100.
The report looks at properties along the northeast coast of the US that were affected by Hurricane Sandy in 2012. Before the storm, property values in the region were rising “much faster than the national median.”
“Since Sandy, areas along the Northeast coast have been less competitive, with home value growth outpacing the national average by about 25%,” the report said. “In the past months there were hurricanes Helene and Milton, the United States paid $480 million to restore 54,000 damaged buildings. Despite the acquisition of NFIP-assisted structures, market prices have not recovered as listed sales prices are down nearly 15% at the time of writing.”
‘The failure of our public policy’
Along with these changes, Bill Killmer, vice president of legal and political officials Mortgage Bankers Associationwould like to see greater participation in the program.
“I think we’re finding after the last two natural disasters, especially in North Carolina and Hurricane Helene, a lot of people didn’t have access, so we need to increase participation in the NFIP,” Killmer said.
At NAR, Perez believes the most effective way to accomplish this is to update the flood maps used to determine coverage areas, and better educate consumers about flood risks.
“Current flood maps do not cover most of the country. “They are on the coast, right in the ocean and along big rivers like the Mississippi,” said Perez. “So, when there’s a hurricane like Harvey or Helene, we have these situations where the majority of the flooding occurs outside of special flood risk areas. Look at what’s happening in Asheville – FEMA doesn’t draw in places like that. “
At CFA, Heller warns that if changes like updated maps aren’t made to the NFIP, it only increases the risk of seeing events like Asheville happen again.
“Asheville proves the failure of our public policy and shows how exposed and underserved we are,” Heller said.
With the increasing frequency of major flood events, Perez and the NAR believe it is important to have a consumer-facing tool for homeowners and buyers to know their flood risk. As it is, Perez said consumers should use the NFIP’s risk rating system to get a flood insurance quote.
“If you go and get an average rating and it’s too high, you need to ask questions,” Perez said. “That’s important information, and what Congress needs to do is give FEMA the resources to get that information out to a direct point to the consumer where they can see flood risk information for their specific address.”
But homeowners aren’t the only ones Killmer would like to see increased participation from. He believes that there are many private entrepreneurs who could be part of this program but do not. As part of any NFIP reforms, Killmer would like to see more ways to encourage private insurers to get involved, such as removing some barriers to entry.
While it remains to be seen if there are any serious changes in the NFIP’s near future, Killmer is hopeful that the incoming Trump administration will be friendly to the program.
“At a time when we’re having a housing affordability crisis, this is just one more argument,” Killmer said. “I think we have leaders on both sides of the aisle — including Chuck Schumer in the Senate and Mike Johnson in the House — from states like New York and Louisiana that are very dependent on the NFIP, so they’re not going to let that program expire.”
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