In recent years, the unpredictability of the National Flood Insurance Program (“NFIP”), administered by the Federal Emergency Management Agency (“FEMA”) has given rise to increasing uncertainty and frustration for coastal and waterfront markets located within Special Flood Hazard Areas. The NFIP program, which provides flood insurance for approximately 5 million residential and commercial properties, requires that homes with mortgages in Special Flood Hazard Areas obtain flood insurance, and that localities where NFIP insurance is provided adopt a floodplains ordinance and develop a flood insurance rate map. According to the National Association of Insurance Commissioners, fully privatized flood insurance programs are almost non-existent. The NFIP covers approximately five million properties, and is over $20 billion in debt (a figure calculated prior to the start of the current hurricane season); last year alone, hurricanes (including Harvey and Maria) triggered $10 billion in claims.
A federal program, the NFIP relies on congressional authorization for its continuance; if Congress does not re-authorize the program (whether due to a government shutdown or other failure to reauthorize), the program lapses. Since 2016, there have been two short lapses and eight short-term extensions, including the two most recent authorizations extending the program from November 30, 2018 to December 7, 2018, and from December 7, 2018 to December 21, 2018. Without further Congressional action, the NFIP will again lapse after 11:59 p.m. on December 21.
If the NFIP lapses, loan closings in Special Flood Hazard Areas may be disrupted. As a preventative measure, lenders should be prepared to follow NFIP/FEMA and other federal regulatory guidelines (FDIC, OCC, and Federal Reserve) that permit loans requiring flood insurance to close even during a lapse. Lenders and borrows should also be aware of the risks associated with a lapse to property that is insured; if the reauthorization is not made retroactive to the date of the lapse, there may be claims that accrued during the uncovered lapse period that will not be recoverable.
There has not been a substantial overhaul of the NFIP since the Biggert-Waters Act of 2012 and Homeowner Flood Insurability Act of 2014. After each of these Acts passed, criticism flooded in from both sides of the aisle. Biggert-Waters would have reduced the program’s debt, but would also have resulted in steep insurance rate hikes for millions of insureds. The Homeowner Flood Insurability Act was aimed at providing relief by avoiding the substantial rate hikes, but effectively gutted most of the reforms Biggert-Waters was intended to provide. Yet, from a financial perspective, NFIP rates are much lower than the actual costs paid out to insureds when a flooding event occurs, which has created constantly-increasing program debt and threatens the future of the program. Furthermore, in many instances, the total claims paid out to repeatedly-flooded homes actually exceed the value of the home itself.
Viewed through an environmental lens, the rapid pace of climate change and associated significant sea level rise – see the Fourth National Climate Assessment Report, prepared by the U.S. Global Change Research Program and released November 2018, for the dire details – also highlights the pressing need for reform. While the NFIP does require a municipal floodplains ordinance to be in place (which may require certain preparedness measures or prohibit building on land at high risk of inundation), there is no direct requirement that properties to which claims have already been paid out under the NFIP engage in flood preparedness retrofits or other measures to reduce the risk of repeated flooding in the future. And although municipal adherence to FEMA’s regulations is a prerequisite for participation in the NFIP, the NFIP does not offer specific incentives to encourage floodproofing retrofits or assistance to relocate to higher ground. According to the Associated Press, nearly 37,000 properties have been flooded and rebuilt with the assistance of the NFIP; about 18,000 of those same properties are still covered by the program; and 15,000 of those properties have not taken any voluntary steps to reduce their future risk. Understandably, significant retrofits are beyond the financial means of many homeowners. Thus, Congress should consider revising the NFIP to provide some funding to homeowners who either proactively choose to retrofit their homes (or move to higher ground), rather than continuing to lose money paying out claims on properties that are repeatedly damaged by flood events.
In sum, both lenders and all who are prospectively or currently insured under the NFIP should take preparatory measures for the imminent possible lapse of the program. It is critical that Congress reauthorizes this program promptly. But beyond this immediate issue, Congress ultimately must consider revamping the NFIP to account for the reality of sea level rise and require that more substantial mitigative measures be taken for properties located within areas most vulnerable to flooding.