By Jan Sternin
Expect Further Debate This Year
On the Future Role of Flood Insurance
WHEN IT WAS REPORTED THAT THE FEDERAL
Emergency Management Agency lacked the financial
resources required to pay all the insurance claims from
the communities ravaged by the 2005 Atlantic hurricane
season, it served as a grim awakening for the federal
government to examine its role in natural disasters,
specifically the future role of flood insurance.
Hurricanes Dennis, Katrina, Rita, Stan and Wilma have
become infamous synonyms for catastrophe and rank at
the top of the most devastating natural disasters in
American history. The rebuilding of businesses and
homes impacted by the storms continues at a snail’s pace
in certain locales, primarily because a significant number
of properties were not covered by flood insurance.
Because the magnitude of these storms was unprece-
Legislation that balances federal fiscal
responsibility with the need for
affordable insurance is important.
dented and areas behind levees were considered safe
from flooding, entire communities across a multitude of
states were not within a Special Flood Hazard Area. As a
result, many businesses and homeowners were not
required to purchase flood insurance. Others were underinsured because of the statutory $250,000 maximum
coverage for single-family and multifamily properties. The
cap for commercial properties was $500,000.
Unlike Hurricanes Dennis and Stan, Katrina became
the most expensive and one of the deadliest hurricanes in
US history, with damage costs exceeding $50 billion and
human fatalities, directly and indirectly, topping 1,300.
Legislative entities are responding to these problems.
The only question is whether their efforts will do more
harm than good. The US Senate recently introduced the
“Flood Insurance Reform and Modernization Act of
2007,” which would implement a long-term reauthorization of the National Flood Insurance Program, forgive
FEMA debt to the Treasury and increase the coverage
limits for multifamily properties. These are all very positive
However, financial industry experts and analysts
including those representing housing, commercial and
multifamily organizations have raised some concerns.
In October, the MBA submitted a letter to Senator
Christopher J. Dodd (D-CT), chairman of the Committee
on Banking, Housing and Urban Affairs and Richard C.
Shelby (R-AL), ranking member. That letter examined and
commented on provisions that could negatively impact
the residential, multifamily and commercial real estate
Several provisions within Senator Dodd’s bill will impact
the availability and affordability of loans to current and future
business owners as well as owners of rental properties. If
passed in its current form, FIRMA would establish an
annual FEMA contribution of $500 million to a reserve
fund and would base flood insurance premiums on past
natural disasters. In addition, those assets built prior to
updated flood maps—dubbed “pre-FIRM properties”—
would no longer be eligible for the lower rates that the
current program provides. Additionally, those properties
re-mapped into the 100-year flood plan would be
required to pay premiums based upon actuarial rates
phased in over a two-year period.
These factors could translate into a market-wide
increase in premiums on existing and future flood insurance policies. This would consequently create further difficulties in the already-struggling commercial and residential
mortgage markets because businesses and residents
would be hard-pressed to pay higher premiums.
The bill also mandates that residual-risk properties—
those protected by levees or dams—purchase flood
insurance. Although its potential economic impact on
businesses and communities is unclear, at a minimum, a
lower premium structure should be mandated.
Moving forward with reauthorization and modernization
of NFIP is critical. Legislation that balances federal fiscal
responsibility with the need for affordable insurance is
important to maintain viable communities.
The views expressed in this article are those of the
author and not Real Estate Media or its publications.
Jan Sternin is senior vice president of commercial and multi-family for the Mortgage Bankers Association in Washington,
DC. She may be reached at firstname.lastname@example.org.
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