Lawmakers are beginning to look more closely at the impact of a hike in federal flood insurance premiums set to go into effect next month, which some bankers warn could topple the still weakened real estate market in certain regions.
The Senate Banking Committee will host a hearing on Wednesday to examine the effects of the Biggert-Waters Flood Insurance Act of 2012, which eliminated grandfather clauses that, until now, prevented premiums from rising for some properties.
Community bankers, several trade associations and some lawmakers have been pushing for a delay of the rate hikes, which are set to go into effect Oct. 1. They caution that some properties could see premium increases of 500% or more to reflect full "risk-based" rates.
"There's a fear this could have a chilling effect on people's ability to finance their property if they have to put so much into flood insurance," said Paul Merski, executive vice president for congressional relations and chief economist for the Independent Community Bankers of America. "It is a big issue in Louisiana, Texas, Florida and Alabama — areas where you have moderately priced properties, but you're going to have dramatic increases in the flood insurance premium."
Mickey Thomas, president and chief executive of South Louisiana Bank in Houma, La., pointed to several properties facing large premium increases in his state. A $171,900 home in St. Charles Parish, La., for example, will see its premium jump from $388 to $23,946 per year — at which point the monthly price for flood insurance will be more than two times the house payment.
"That's a horrific jump," Thomas said, warning that the new premiums will reduce the value of affected properties and hurt the local economy.
The premium hike takes place over four years, with 25% of increases spaced over that time until the new price is reached.
To be sure, only about 20% of the National Flood Insurance Program's roughly 5.5 million policies are subsidized, and the majority will not face such steep increases, said Kevin McKechnie, senior vice president and director of the American Bankers Association's office of insurance advocacy.
But the policy change could still have an impact locally, warns Thomas.
"The economic impact of this is significant," he added. Even in cases where families can afford the premium increases, "they pay it at the expense of something else. This is a leakage from the spending stream. The money's going away and it's going to have a negative economic impact on the area."
In cases where borrowers aren't able to meet the increased financial burden, the bank will have to step in and force place the insurance, raising a host of additional questions in areas like Louisiana where private flood insurance isn't widely available.
"If the company doing force-placed insurance says, 'OK, we're willing to take on a certain amount of risk,' what happens when their appetite for insurance coverage is full — and should there be no private market at the time that happens, then how does a bank fulfill its obligation to require insurance?" said Thomas. "That's a question that I don't know the answer to yet."
McKechnie said the ABA is working with several other industry groups, including the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association, to get a temporary delay in place.
"We're going to discuss these problems as an industry," he said. "The anecdotal information is really starting to pour in — there's a group of homeowners that's going to be dramatically affected."
The ICBA urged lawmakers in a letter earlier this month to take up legislation that would delay the premium increases for some property owners, in part to allow the Federal Emergency Management Agency to finalize a mandated affordability study on the issue.
"Broad swathes of the country will be impacted," the letter says.
Several lawmakers, including Sens. David Vitter and Mary Landrieu, and Reps. Bill Cassidy and Cedric Richmond of Louisiana, have already introduced bills and amendments to postpone the rate increases from taking effect for one or more years. Vitter and Landrieu will also appear as witnesses at Wednesday's Senate Banking Committee hearing to make their case, along with FEMA's administrator W. Craig Fugate, and others.
"We need to make sure that people who have been following the rules aren't priced out of their homes because their flood insurance rates increase so dramatically," said Vitter, a member of the banking panel, in a June press release.
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