Navigating Man-Made Disasters When Buying or Selling a Home: Expert Insights
Consumers in the market for a home have been eagerly awaiting the Federal Reserve’s potential interest rate cut in September. However, another significant change looms on the horizon at the end of that month that could complicate the process of buying or selling a home in certain areas, as well as refinancing an existing mortgage.
The National Flood Insurance Program (NFIP), the largest flood insurer in the United States, is in need of reauthorization by September 30 to continue issuing new policies or increasing coverage on existing policies. This deadline is crucial for those looking to navigate the real estate market, especially in flood-prone areas.
Homeowners insurance policies typically do not cover flood damage, which means that consumers must obtain a separate flood insurance policy to protect their homes and belongings. Depending on the flood risk associated with the property, mortgage lenders may require applicants to secure flood insurance before finalizing the home purchase.
Jaret Seiberg, a managing director and financial policy analyst at TD Cowen, emphasizes the importance of the NFIP reauthorization for potential homebuyers. He warns, “This is about the ability to get a mortgage in a flood zone after Sept. 30. Without an [NFIP] extension, you’re not going to be able to get a mortgage in any area that requires flood insurance.”
Established by Congress in 1968, the NFIP was designed to offer affordable flood insurance coverage to homeowners. However, the program faced a major challenge in 2017 when the Biggert-Waters Flood Insurance Reform Act of 2012, which included the NFIP authorization, expired. Since then, Congress has extended the NFIP’s authorization multiple times, but it has also experienced brief lapses, creating uncertainty for homeowners and potential buyers.
Bryan Greene, vice president of policy advocacy at the National Association of Realtors, expresses frustration with the recurring issue of NFIP reauthorization. He states, “We’re trying to prevent natural disasters, but we seem to always face this potential man-made disaster of not acting timely enough.”
### Potential Impact on Home Sales
If the NFIP experiences a lapse in its authority, it will be unable to issue new policies or increase coverage on existing policies. This could lead to complications in home sale transactions, as buyers may struggle to obtain flood insurance required by their lenders. Jeremy Porter, head of climate implications research at First Street Foundation, cautions that home sales may be delayed or put on hold until flood insurance coverage is secured.
During a previous NFIP lapse in 2010, 6% of real estate agents reported delayed or canceled sales, highlighting the potential impact of such disruptions in the real estate market. With an estimated 40,000 closings at risk during a one-month NFIP lapse, the implications for homebuyers and sellers are significant.
Private flood insurance options are limited, making the NFIP the primary choice for flood coverage. Daniel Schwarcz, a professor of law at the University of Minnesota Law School, notes, “There are very few private insurers that offer any type of flood insurance. The NFIP is the only available option for flood insurance.”
In the event of an NFIP lapse, the search for alternative coverage becomes even more challenging. Jaret Seiberg of TD Cowen warns, “If you eliminate that foundation, the rest of the market isn’t there,” underscoring the importance of timely NFIP reauthorization for the stability of the real estate market.
### Implications for Homeowners
Existing NFIP policyholders may wonder how a lapse in the program’s authority could affect their coverage. While policies in force will remain active during a lapse, new policy issuance and coverage increases will be put on hold. Homeowners with policies up for renewal around September 30 are advised to renew early to avoid potential disruptions in coverage.
Yanjun Liao, an applied microeconomist and fellow at Resources for the Future, emphasizes the importance of planning ahead for policy renewals. He advises homeowners to check their expiration dates and make arrangements in advance to ensure continuous coverage in the event of an NFIP reauthorization delay.
For homeowners considering refinancing their mortgages, the September 30 reauthorization deadline should be taken into account if flood insurance coverage is required by the lender. Timing the refinancing process to avoid potential NFIP lapses can help streamline the transaction and mitigate any delays.
### Challenges in NFIP Reauthorization
The NFIP’s reauthorization process has been fraught with challenges, primarily due to the lack of viable alternatives and concerns over policy pricing. Critics have raised issues regarding the program’s pricing structure and subsidy model, which have led to debates over the program’s sustainability.
First Street Foundation’s Jeremy Porter highlights the impact of FEMA’s Risk Rating 2.0 pricing system, which aimed to reflect the true cost of flood risk in insurance premiums. However, the sudden increase in premiums has sparked backlash from homeowners and elected representatives in coastal states, who argue that the new pricing model is unaffordable.
Sen. Bill Cassidy of Louisiana has called for improvements to the NFIP, particularly in addressing rising premiums and ensuring affordability for policyholders. The ongoing debate over the program’s pricing and sustainability underscores the challenges in finding a balance between financial responsibility and providing adequate flood insurance coverage.
Despite the criticisms of the NFIP, Congress is unlikely to let the program expire due to its importance to millions of homeowners across the country. Jaret Seiberg of TD Cowen acknowledges the program’s flaws but emphasizes the necessity of finding a solution that ensures continued coverage for those dependent on the NFIP.
In conclusion, the impending deadline for NFIP reauthorization poses significant challenges for homebuyers, sellers, and existing policyholders. Planning ahead, renewing policies early, and staying informed about the reauthorization process are essential steps for navigating the potential impacts of an NFIP lapse. As Congress grapples with the complexities of flood insurance policy, homeowners and stakeholders must remain vigilant in protecting their properties and investments in the face of man-made disasters.