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National Flood Insurance Program (NFIP)

Extended! The National Flood Insurance Program

Drip. Drip. Drip.

That might be the sound of Congressional re-authorizations of the National Flood Insurance Program (NFIP), which enables homeowners to purchase flood insurance in approximately 21,000 U.S. communities, including many in Virginia.

Since 2008, the NFIP has experienced ten short-term extensions and five temporary shutdowns. The program lapsed twice in 2010 alone.

The NFIP authority was extended as part of H.R. 2112, a technical bill that combined three annual spending bills with a stopgap funding measure to keep the federal government open for business.

The NFIP is the only option most homeowners have to insure their property against flood damage, which can be destructive and costly to repair. A lapse in the authorization doesn't affect existing policies, but makes for-sale homes ineligible for new government-related mortgages, a serious concern for home buyers and sellers.

The reauthorization is a positive step, but everyone knows floods don't come in slow drips.

That's why the National Association of REALTORS® is urging Congress to approve a five-year re-authorization of the NFIP, ending the uncertainty and avoiding further disruption to housing markets in flood-prone communities. The Virginia Association of REALTORS® also supports this goal.

Congress should extend NFIP authority for a full five years to allow time for needed reforms.

The National Flood Insurance Program (NFIP) is vital to millions of homeowners in more than 21,000 U.S. communities, many of them here in Virginia. But the federal government-run program is unstable and in danger of yet another lapse in its Congressional operating authority, which expires Sept. 30. All Virginia homeowners should be concerned about this issue, regardless of whether their home is located in a flood plain, because any lapse in the program's authority creates severe disruption in local housing markets.

The NFIP enables homeowners to insure their property against damage caused by flooding, one of the most destructive and costly catastrophes. Without the program, this risk would be uninsurable. While a temporary lapse won't affect existing policies, homes located in flood-plain areas will, overnight, become ineligible for new government-related mortgages, bringing half or more of home sales in these areas to a halt and harming still-fragile housing markets.

That might sound alarmist, but the NFIP has experienced nine short-term extensions and five temporary shutdowns since 2008. Last year, the program was allowed to lapse on two separate occasions. During the second stoppage in June 2010, some 47,000 home sales were delayed or cancelled, according to a National Association of REALTORS® (NAR) member survey.

For most of its history, the NFIP has collected enough premium revenue to cover claims and operating costs, though at times, the program has relied on short-term loans, paid back with interest, from the U.S. Treasury to tide over difficult periods. The program currently owes about $18 billion due to claims from flooding caused by severe weather events in recent years. Still, without the NFIP, there would be no premium revenue to offset these losses, putting taxpayers on the hook for more disaster relief and post-disaster rebuilding loans and grants. The bottom line is that the NFIP saves taxpayers money by reducing the amount of relief that's paid for by all taxpayers, rather than only those who are at risk and have purchased flood insurance. (Technical maps that show Special Flood Hazard Areas can be obtained from the Federal Emergency Management Agency Map Service Center.)

Critics have suggested the NFIP should be abolished and flood insurance privatized. That might sound attractive, but private-market flood insurance was already proven unworkable before the NFIP was created in 1968. The main problem is what economist call "adverse selection," which means only those at risk choose to purchase the insurance. Adverse selection makes insurance premiums more costly, which prompts fewer people to purchase the insurance, thereby exacerbating the problem and repeating the vicious cycle. Currently, only four private-market companies offer flood insurance, and those policies are sold only for million-dollar properties owned by high net-worth individuals.

The Virginia Association of REALTORS® supports legislation that would reauthorize the NFIP for five years, putting a stop to the disruptive lapses and allowing time for reforms to achieve results. The association also favors maintaining funding to update NFIP flood-plain maps, opening up the program to second homes and investment rental houses, addressing the known problem of repetitive-loss properties, which make up 1 percent of the policies, but account for 30 percent of the claims, and encouraging more homeowners to purchase flood insurance, if it makes sense for them.

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