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A Rising Tide for Flood Insurance Reform

U.S. Housing Policy Outlook: April 2017

Stuart Pratt    |    Videos

 

The National Flood Insurance Program (NFIP), overseen by the Federal Emergency Management Agency (FEMA), aims to reduce the impact of flooding on private and public structures across the United States through the provision of affordable flood insurance and the mitigation of negative externalities associated with flood disasters.  This program was initially created in 1968 with the passage of the National Flood Insurance Act, and it has been reauthorized multiple times since.  Unfortunately, these reauthorizations are usually in the form of short-term extensions (there have been 12 such extensions since 2008).  Now, the 115th Congress is determined to break that cycle and pass a multi-year, long-term reauthorization to provide security and consistency to those working in the industry.

Capitol Hill Timeline

Two committees will lead the reauthorization discussion on Capitol Hill: the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee.  Both have placed the NFIP reauthorization at the top of their agendas, having already held hearings on the program and interviewed witnesses in both the public and private sector to gather recommendations for improvement.  The ball is rolling forward steadily and should pick up more momentum as we transition from spring to summer.  In fact, we expect both committees to undertake most of the heavy lifting in this reauthorization bill prior to their August recess, allowing them to produce a mature work product (and possibly a clean bill) that could be placed on the President’s desk well before the expiration of the program at the end of September.

Potential Changes to the Program

There are numerous changes to the program being discussed in Congress, but the largest headline involves the increased participation of the private market.  In 2012, Congress passed the Biggert-Waters Flood Insurance Reform Act, which attempted to bring the private sector into the marketplace but was unsuccessful in doing so due to confusion as to which private flood insurance plans satisfied NFIP requirements.  Having learned from this experience, the House of Representatives passed a bill during the last Congress that would increase private-sector participation. The legislation received more than 400 votes in favor, almost unheard of in today’s extremely partisan atmosphere, suggesting that there is a bipartisan consensus for private-sector participation.

CoreLogic and Reconstruction Cost Value

CoreLogic is particularly suited to improve the NFIP thanks to our unique datasets and analytical tools: from flood risk models to multiple structure indicators to precise parcel data, CoreLogic has the capabilities to bring the program into the 21st century.  For example, in order to more precisely define the risk associated with a portfolio of loans, FEMA and the NFIP require a much more accurate definition of ‘reconstruction cost value’ – CoreLogic can improve that definition by incorporating our suite of geospatial data, building footprint data and valuation models to better assess a property’s true natural hazard risks.  This will ensure the NFIP is establishing the premium revenues it needs, while providing insight as to how those premiums correlate with the total risk in a portfolio.

Potential Disagreements

Despite the overwhelming bipartisan support for this reauthorization, there are still several disagreements that need to be solved.  However, unlike most debates which tend to fracture along partisan lines, the debate surrounding the NFIP has much more to do with geography and recent history.  There are representatives from coastal regions, and there are representatives who live inland; there are representatives who live in Special Flood Hazard Areas (SFHAs), and there are representatives who do not; there are representatives who were greatly affected by catastrophes such as Hurricane Katrina and Superstorm Sandy, and there are representatives who have had the fortune to avoid such natural disasters.  This reauthorization truly embodies the well-known credo associated with former House Speaker Tip O’Neill that “all politics is local.”  As a result, there are several divergent opinions that are being matured this spring and hopefully will be brought to consensus over the summer.  Thankfully, none of these differences appear to be insurmountable.  Congress understands the urgent need to pass this reauthorization bill, as thousands of home sales could be lost every day once the program expires.  When the program lapsed during the month of June 2010, the National Association of Realtors (NAR) estimates that 46,886 transactions were lost, an average of 1,421 per day.

Conclusion

CoreLogic is optimistic regarding the current debate surrounding NFIP reauthorization.  There is a good likelihood that we will see a mature bill come together over the summer, but even if that doesn’t occur, Congress already has a fallback plan. They understand that if they don’t get the job done, they’ll need to provide another short-term extension, perhaps two years in length.  While not optimal, an extension would provide legislators with enough time to work out the final issues and hopefully provide a more stable reauthorization in the range of five-to-seven years.  CoreLogic will continue to monitor the status of the reauthorization over the coming months, ensuring that lawmakers are aware of our company’s capabilities that could be used to improve the National Flood Insurance Program.

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