Trump wants to curtail flood insurance in flood prone areas. This all seems logical, so why is this such a big issue? As many environmentalists cheered, homebuilders were aghast. Trumps new plan would radically overhaul the 1968 program which protects property owners near coasts or rivers. This would impact property owners throughout the country. What is the new proposal?
The current flood insurance program is over 25 billion underwater and that tally will likely grow larger as the hurricane season progresses. The crux of Trump’s new programs says that the federal government will not offer flood insurance for new homes built after 2020 in flood prone areas. The flood insurance program would continue for houses in 100-year flood zones but discontinue it for any new homes in the area.
In addition to curtailing coverage, the new plan would also give FEMA the ability to cut off coverage to properties that repeatedly flood. This is a radical change from the current policy where FEMA can’t deny coverage even if a house has flooded multiple times and the claims are worth more than the house.
Why is this such a big deal? Currently there is not a viable private flood insurance market and so if a property is in a flood zone, it is required to have flood insurance to get a federally backed mortgage. Without flood insurance, building in many of the areas will not be viable.
What about private flood insurance? There currently isn’t a large market for private flood insurance and it likely will be prohibitively expensive if/when it becomes available. For example, look at the federal flood insurance program; it is running a deficit of 25 billion dollars. Why would a private company want to take on the risk without being rewarded? With the increase in costs associated with storms, it is highly improbable that there will be a cost competitive private flood policy
What is the impact of this proposed change? After 2020 the vast majority of new building will cease in 100 year flood plains. It will not be cost effective. This will force builders inland.
What happens to existing homes? Currently existing homes in 100-year flood plains are fine on their coverage. The wildcard is how aggressive Fema will be in “cutting off coverage” to repeat flood offenders. There are many properties that fall into this category.
What happens if a property owner is “cut off”? This is the wild card that hasn’t been fleshed out yet. If a property is cut off will the federal government buy the property? Will the federal government cease to insure the property basically making it unsaleable? What happens to the property owner and the lender that has a mortgage on a property that is basically worthless?
With new storms predicted to hit the gulf, the urgency of shoring up the federal flood insurance program is growing. If the proposed legislation passes the effect on homebuilders and property owners will be profound.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).