Changes in National Flood Insurance Program

The good news is that we still have a National Flood Insurance Program! The bad news is that, like many other government programs, it has been woefully underfunded and is likely to keep seeing big payouts, due to the projected increase in storms and flooding.

In July of 2012 Congress passed the Biggert Waters Act to address the ongoing financial issues imbedded in the NFIP. The result is significant change in the program. Highlights include:

1. Effective October 1, 2013, there is a new 5% Reserve Assessment Fee for all flood policies except Preferred Risk Policies (PRP) and any Group Flood Insurance Policies (since those are based on the total policy premium). In addition, October 1, 2013, will also bring on an average 10% rate increase for all policies, although the percentage will vary depending on what flood zone the property is in (from 1% to 17% variance).

2. If your flood insurance was subsidized (1 in 5 policies ARE, according to FEMA) – it probably won’t be after July 6, 2012. Anyone purchasing a house in the Special Flood Hazard Area (SFHA) on or after July 6, 2012, when the structure is one built either before 12/31/1974 OR before the initial Flood Insurance Rate Map for the area was put in place (known as a “Pre-FIRM” Property) will pay the unsubsidized, market rate for the insurance – the full risk rating, using the current map information. It does appear that this increase may be implemented by 20% per year (capped) increases for 5 years, to get to that market rate (25% for non-primary residences and businesses).

a. NOTE:  FEMA estimates that only 20% of all NFIP insured properties are subsidized, so this requirement will impact 1 in 5 NFIP insured properties.

b. For any new policy issued after October 1, 2013, a “Full Risk Rating” is applicable – meaning the property will require an elevation certificate in conjunction with the most recent flood map, to determine what the correct cost of coverage will be.  Many properties that were placed into the flood plain after they were built (called “PRE FIRM, or pre-existing Flood Insurance Rate Map properties) do not have an existing elevation certificate and will need to obtain one to get a flood insurance quote.

The bottom lines are these –

  • Sellers should be aware, if they have subsidized coverage, the cost of insurance to a new buyer is going up – significantly. And this increase may impact the desirability or at least pricing of their property for people buying on a budget.
  • Sellers should consider getting an elevation certificate request processed, if they don’t have one already, so that an accurate quote for a buyer can be accomplished in a reasonable time – these can take up to 6 weeks by some accounts.
  • Buyers should get their flood insurance quotes as soon as possible and should consider making their offers contingent upon receipt of an acceptable quote. Even if a quote does not ruin a borrower’s ratios and trigger a loan denial, it may make the house “over budget” for a particular Buyer.

“Remember, good ethics is good business.”
Shannon R. Harner, General Counsel

Editor’s Note: The National Association of REALTORS (NAR) has also produced a video that helps explain the changes to the NFIP and rate schedules.  NAR President Gary Thomas has created a Presidential Advisory Group to address the issues related to the recent changes to the NFIP.

Link to FEMA FAQ on NFIP

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