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Homeowners, real estate agents want flood insurance rate hike delayed

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One Realtor says, “Just the threat of flood insurance rates going up will keep potential buyers from buying." See the Q&A at the end of this article.

By Kevin Brady
Flood insurance rate hikes that went into effect Oct. 1 are already hurting some home sales in South County, leaving homeowners who want to sell their homes high and dry and real estate experts concerned about the long-term impact on the local housing market.

The new rates will impact at least 20 percent of the sales at Century 21 Beggins, said owner Craig Beggins.

“That’s about 60 sales a month and that will be pretty devastating to me,” said Beggins who has offices in Apollo Beach, Sun City Center and Tampa.

“I had one contract cancel this morning (Sept. 27) in Apollo Beach where the flood insurance went from $1,000 to $6,000 a year on a $100,000 house. The buyer could not qualify for that type of payment.” Higher flood insurance premiums also sank a sale for a $250,000 home in Clearwater last week, Beggins said. “The flood insurance there went from $1,200 to $13,000 a year.”

Beggins, who has been selling homes in South County for 22 years, is recommending homeowners concerned about rates first get a flood elevation certificate. “Send that off to your insurance company so you can be rated. Once that happens, you will know where you are.”

Thousands of Hillsborough County homeowners and businesses currently pay subsidized flood insurance rates through the National Flood Insurance Program (NFIP).

With the NFIP $24 billion in the red after losses from Hurricane Katrina and other devastating floods, Congress passed the Flood Insurance Reform Act last year in an attempt to restore solvency to the program with insurance rates more reflective of the risk of living on the water.

Of the NFIP’s 5.6 million policy holders, 1.1 million are subsidized, according to the Federal Emergency Management Agency (FEMA). Florida is the program’s largest customer with 2 million policies. Of those, 270,000 are subsidized by the federal government. Around five percent of subsidized property holders – those covering non-primary residences, businesses, and severe repetitive loss properties - will see immediate increases to their premiums, according to FEMA.

“Realtors understand the need for solvency in the federal flood program. However, the law contains severe unintended consequences that are harmful to Floridians as well as other states,” said Florida Realtors President Dean Asher. “We believe the reforms will have a detrimental impact on the entire economy of Florida, including existing homeowners and those who want to buy Florida properties,” said Asher after a meeting with Gov. Rick Scott last week on the issue.

The state legislature is currently studying ways to help those who will be hit hardest by the new rates including asking the federal government to delay implementing the rate hikes for a year. Other states have taken more drastic action. The Mississippi Department of Insurance filed a lawsuit Sept. 27 in a bid to stop the rate hikes.

Barring a last-minute intervention by the U.S. Senate to delay the rate hike – the U.S. House of Representatives has already passed a bill asking for a delay – some homeowners and businesses will see their rates jump by hundreds or thousands of dollars a year.

The rate hike is expected to hurt those with investment properties, businesses and anyone trying to sell a home in coastal areas.

A family with one home on or near the water will not see their rates increase immediately, according to FEMA. A single family home claimed as a homeowner’s primary residence – and homesteaded as such – is grandfathered in with the old flood insurance rates. However, even those lower grandfathered rates could increase next year when FEMA begins a five-year phase-in of new rates using revised flood risk data. Details of this are still in development.

Those buying a home in flood-prone areas will also have to dig deeper. Anyone buying a home in an area deemed at risk of flooding will pay the new rates, making that home a lot less attractive to potential buyers, Realtors say.

Amy Soto, a Riverview Realtor who has been buying and selling homes in South County for 13 years, said the rate hike is already having a chilling effect on the local real estate market.

“Just the threat of flood insurance rates going up will keep potential buyers from buying. It’s going to be a much harder sell for some people and it will limit the buyer pool.”

None of which is good news for the local real estate market which was “pretty stagnant” until earlier this year. “Then sales really took off,” Soto said. “We only have about two months of inventory now.” Meaning Soto has only enough homes for sale to last her 60 days. “Anything below five months is generally seen as a seller’s market.”

Steep increases in flood insurance rates could easily price potential buyers out of the market for homes in coastal communities, said Scott Shelby, a mortgage loan officer with HomeBanc who works the South County market.

“For those buyers who are looking to buy a home that needs flood insurance, if those rates go up two or three times the debt to income ratio is going to be impacted and depending on where their income ratio is they may not be able to purchase that home,” Shelby said.

So if you were approved to use 45 percent of your income to make a mortgage payment and you add another $2,000 a year on that for flood insurance, “that can make all the difference in the world for people being able to make that payment.

Basically they are one flat tire away from not being able to make their payment,” said Shelby, an 18-year veteran of the mortgage business.

Just not knowing if and when rates will increase is hurting, said Sharon Van Loan who has lived on the water in Apollo Beach for 15 years.

“We are not able to tell yet if rates will go up and it’s that unknown that makes it so much worse,” said the Keller Williams Realtor.

While many potential buyers are not aware of the rate hikes, “Realtors are duty bound to make buyers aware of how this might impact their insurance rates. I think everyone is hoping those in power will realize how this could impact the real estate market in our area. It will certainly have a negative effect on my business,” Van Loan said.

In June, the U.S. House of Representatives passed a bill delaying the rate hikes for a year but that bill has been mired in the Senate, a victim of the ongoing budget battle.

“I know Senator (Bill) Nelson (D-FL) is working very hard to have it included in an appropriations bill but you have a group of Tea Party Republicans there who are not interested in any kind of delay,” said Congresswoman Kathy Castor (D-Tampa/St. Petersburg) whose waterfront district includes Riverview, Apollo Beach and Ruskin as well as Tampa and the southern tip of St. Petersburg.

Castor, whose office has been peppered with calls from homeowners angry about potential flood insurance rate hikes, said while “everyone wants the National Flood Insurance Program to be solvent, it is completely untenable to pass the cost on to small businesses and homeowners. It has to be phased in over time.”

Chances of the Senate delaying the rate hike — “50-50” at the start of the week Castor said — are now slim, according to the congresswoman who brought the issue up Sept. 25 with Harry Reid, the Senate’s majority leader.

“We are working very hard to get folks in the Senate to realize this would be an economic hit not just in Florida but one that would ripple across the country.”

Sen. Nelson believes the new rates will bust the budgets of most middle class families, many of whom have been calling his office upset with the proposed changes.

“A key mission of the flood insurance program is to encourage Americans to purchase flood insurance and for the insurance to be affordable,” Nelson said in a Sept. 13 letter.

“But many homeowners in Florida are concerned that the insurance rate increases scheduled to go into effect this year will make it impossible for them to sell their homes or pay the premiums. This is an impossible choice for most Americans. I’m not opposed to making the flood insurance program more financially stable, but it won’t do much good if it turns out folks cannot afford the coverage.”

The long-term solution to the problem lies with the free market, said Beggins who believes private insurance companies will step in once federal subsidizes are gone.

“I have lived in Apollo Beach for 25 years and been paying flood insurance without a claim. I think other insurers will enter the market to get a piece of that business.”

While rates offered by private insurance companies will be higher than the subsidized NFIP rates “it won’t be as drastic as these new rates. I firmly believe new companies will enter the market saying ‘I want a piece of this lucrative insurance market and now that the government is not subsidizing rates I can charge a competitive rate.’”

For more information on changes to NFIP flood insurance rates, see FEMA’s web page on the subject: http://www.fema.gov/flood-insurance-reform-act-2012.

Flood Insurance Q&A

1. Why are rates rising?
Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012 to extend the National Flood Insurance Program (NFIP) for five years. The law requires major changes to the program, including flood insurance, flood hazard mapping, grants, and the management of floodplains. Many of the changes are designed to make the NFIP more financially stable, and ensure that flood insurance rates more accurately reflect the real risk of flooding. The changes will be phased in over time, beginning this year.

2. Why change things now??
Flooding has been, and continues to be, a serious risk in the United States—so serious that most insurance companies have specifically excluded flood damage from homeowners insurance. To address the need, in 1968 the U.S. Congress established the NFIP as a federal program. It enabled property owners in participating communities to purchase flood insurance if the community adopted floodplain management ordinances and minimum standards for new construction. However, owners of existing homes and businesses did not have to rebuild to the higher standards, and many received subsidized rates that did not reflect their true risk. Over the years, the costs and consequences of flooding have continued to increase. For the NFIP to remain sustainable – the program is $24 billion in the red — its premium structure must reflect the true risks and costs of flooding. This is a primary driver for many of the changes required under the law.

3. Will everyone with NFIP policies see their rates change?
More than 80 percent of policyholders (representing approximately 4.48 million of the 5.6 million policies in force) do not pay subsidized rates. About 20 percent of all NFIP policies pay subsidized rates. Only a portion of those policies that are currently paying subsidized premiums will see larger premium increases of 25 percent annually starting this year, until their premiums are full-risk premiums. Five percent of policyholders — those with subsidized policies for non-primary residences, businesses, and severe repetitive loss properties — will see the 25 percent annual increases immediately. Subsidies will no longer be offered for policies covering newly purchased properties, lapsed policies, or new policies covering properties for the first time.

The 80 percent of NFIP policies that already pay full-risk premiums will not see these large premium increases but most policyholders will see a new charge on their premiums to cover a Reserve Fund assessment. Additional changes to premium rates will occur upon remapping. These premium rate changes will not be implemented until the latter half of 2014.

4. Which properties will be most affected by changes in rates?
Rate changes will have the greatest effect on properties located within a Special Flood Hazard Area (SFHA) that were constructed before a community adopted its first Flood Insurance Rate Map (FIRM) and have not been elevated. For many communities the initial FIRM would have been adopted in the 1970s and 1980s. Your local insurance agent will be able to provide you the initial FIRM date for your community.

Many of these pre-FIRM properties have been receiving subsidized rates. Subsidies are already being phased out for non-primary residences. Starting this fall, subsidies will be phased out for businesses, properties of one to four residences that have experienced severe repetitive loss and properties that have incurred flood-related damages where claims payments exceed the fair market value of the property. Premiums for these properties will increase by 25 percent per year until they reach the full risk rate.

Subsidies are not being phased out for existing policies covering primary residences. However, the subsidy provided to primary residences could still be lost under conditions that apply to all subsidized policies. Subsidies will be immediately phased out for all new and lapsed policies and upon sale of the property. There may also be premium changes for policyholders after their community is remapped. But that provision of the Act is still under review and will be implemented in the future.

6. What happens if a policy with subsidized rates is allowed to lapse or the property is sold?
Starting this fall, for all currently subsidized policies, there will be an immediate increase to the full risk rates for all new and lapsed policies and upon the sale/purchase of a property. Full risk rates will be charged to the next owner of the policy.

7. When will NFIP grandfathering be eliminated?
Currently, the NFIP Grandfather procedure provides eligible property owners the option of using risk data from previous Flood Insurance Rate Maps (FIRMs) if a policyholder maintained continuous coverage through a period of a FIRM revision or if a building was constructed “in compliance” with the requirements for the zone and BFE reflected on a previous FIRM.

Using new flood risk data, FEMA will phase in new rates over five years starting in the latter half of 2014. Many of the precise details of this implementation are still under development.

For more information on changes to NFIP flood insurance rates, see FEMA’s web page on the subject: http://www.fema.gov/flood-insurance-reform-act-2012.

Source: Federal Emergency Management Agency

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