The Private Flood Insurance Bill

The House of Representatives just passed a bill allowing private insurance to meet the flood insurance requirement for homeowners. In most cases, if you have a federally-backed mortgage, and you are on the 100-year floodplain, you have to have flood insurance. Federally-backed, in this case, means a conforming loan for Fannie Mae or Freddie Mac, or one issued by an FDIC or NCUA insured depository institution. There are some other cases, but that’s most of them right there.

The purpose of this requirement is to protect taxpayers from liability through implicit liabilities through the GSE or depository insurance, after a property is lost. After all, without insurance, a homeowner might be better off walking away from a high risk property after a loss. If so, the lender can be made whole again through the NFIP.

Apparently, some lenders are concerned private flood insurance may not be sufficient in practice. Further, the structure of the requirement is changed, placing the GSE’s at direct risk. This is a very real concern, and under the current structure, a loss payout is made to the mortgage company, rather than the homeowner. The House bill changes the beneficiary to the homeowners and mortgage brokers are, probably legitimately, concerned homeowners will pocket the cash and run, leaving the lender with a destroyed property.

These sorts of piecemeal refinements to the NFIP have built up over fiftyish years and will continue. This is not abnormal for a federal program. But what the NFIP really needs is a comprehensive reform, with proper analysis of the implications, benefits, and costs for all parties.

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