Dan Prouty thought it was the perfect home for his client — a 1,700-square-foot Cape Cod on 10 acres in western Anderson County, with a small stream running across the property. The buyer had been looking for a quiet place in the country and agreed to a price of $212,000.
But when the buyer applied for financing, Prouty, a real estate agent with Berkshire Hathaway DeMovellan Properties, and his client were hit with unpleasant news. Although the previous owner had never had to carry flood insurance on the property, a new law called the Biggert-Waters Act and recently revised FEMA flood maps meant the new owner would be required to insurance the house against flood damage in order to obtain financing — at a substantial cost of $6,000 per year, or twice her expected mortgage payment.
The buyer pulled out of the deal.
As Prouty quickly learned, he and his client were not alone.
“It’s cost a lot of people a lot of heartbreak and a lot of money,” Prouty said.
But legislation passed by Congress in recent weeks to rectify the problem is expected to bring welcome relief for home buyers and homeowners in similar situations across the country and the state.
The initial law, the Biggert-Waters Act, was passed by Congress in 2012, with the intention of digging the National Flood Insurance Program out of an $18 billion deficit by bringing heavily subsidized insurance rates on some flood-prone homes in line with actual flooding risks. (That deficit has since grown to $24 billion, in part because of substantial claims related to Hurricane Sandy.) Specifically, homes with subsidized policies that were sold after July 6, 2012, would no longer be eligible for rate subsidies, and the new homebuyer would have to foot the bill for flood insurance premiums at the full-risk rate. In addition, all new or lapsed flood insurance policies would be written or renewed at full-risk rates. As a result, premiums for some properties reportedly spiked ten-fold. In addition, businesses and other non-residential buildings and non-primary residences would see subsidized rates increase by 25 percent per year until full-risk rates were reached.
As part of the initiative, FEMA also launched an effort to revise its flood maps in communities across the country using more sophisticated modeling methods, which in some cases, has added more homes into zones designated as vulnerable to flooding.
Experiences like Prouty’s prompted the Kentucky Association of Realtors, along with the National Association of Realtors, and homeowners, banks and builders across the country, to press Congress for relief, pointing out that the law was, in effect, sharply devaluing real estate, hurting home sales and damaging the economy.
“Realtors are not for the government subsidizing people in the flood zone. Nobody wants that. Everybody wants a responsible approach to flood insurance,” said Joe McClary, CEO of the Kentucky Association of Realtors. “But when they implemented this, it shocked the market with massive flood insurance increases. ... They need time to roll this program out in a more effective way.”
McClary added that many questions have been raised about the accuracy of FEMA’s revised flooding maps as well, and the program needs more time to address and rectify those concerns as necessary.
In mid-March, Congress responded, in the form of the Homeowner Flood Insurance Affordability Act. The new law, which passed with bipartisan support, has rolled back some of the flood insurance sticker shock that had accompanied the Biggert-Waters Act, by reversing the provision that triggered full-risk rates when properties were sold, and requiring refunds to homebuyers who have had to pay the higher rates.
The final legislation does not delay rate hikes, as an early version passed by the Senate would have required, but it does cap annual increases of individual policies at 18 percent. It also calls for FEMA to complete an affordability study and draft an affordability framework for the program and to aim for keeping most premiums to roughly 1 percent of a policy’s total coverage amount.
While many consider flood insurance to be primarily a concern for coastal states, Kentucky’s many rivers and waterways make it an important issue for the Bluegrass state as well, McClary said.
Currently, 24,617 properties in Kentucky are insured through NFIP policies, according to FEMA statistics, with total coverage amounting to roughly $3.7 billion and $19.8 million paid in total premiums. In Fayette County alone, 639 properties are currently covered by flood insurance policies, with total coverage amounting to $114.8 million and total premiums of $573,625. As of 2012, slightly less than half of all the policies issued in Kentucky, or 48 percent, paid subsidized rates.
In Fayette County, revised FEMA flooding maps went into effect on March 3, showing a large portion of the approximate floodplains previously known as Zone A had become Zone AE (having a base flood elevation established). Zone AE indicates vulnerability to flooding from the type of significant storm that is expected statistically once every 100 years, said Greg Lubeck, engineering section manager in Lexington’s Division of Water Quality.
LFUCG has not yet analyzed the data to determine if there has been a net loss or gain of properties/structures in the floodplain, Lubeck said.
“Most of [the county’s rural flood zones] got more narrow,” Lubeck said.
Many of Fayette County’s A zones are located in rural areas, Lubeck said, and AE zones in more developed areas in Lexington are typically located in older neighborhoods with homes built closer to creeks.
Lubeck also pointed out that flood insurance policies are not restricted to properties located in floodplains.
“Anybody in Fayette County should be able to buy flood insurance,” Lubeck said.
While the most recent legislation mitigates the sharp rate increases experienced in 2013, properties designated as flood-prone will still be susceptible to higher premiums over time. Even with the roll back of much of the Biggert-Waters Act, Prouty said he will be keeping a watchful eye on the potential for rising flood insurance expenses in the future.
“With this experience, I will not have buyers look at houses that are anywhere near a body of water until I check a FEMA flood map,” Prouty said.
According to McClary, the most important thing is for such increases to be implemented fairly, with enough time for both homeowners and the market as a whole to adjust gradually.
“No responsible person wants the government to pick up the tab long-term for someone who built their home in the flood zone. That’s not a responsible approach,” McClary said. “But as the government weans the country off of these subsidies, it’s important that it’s done correctly and it’s done over an appropriate amount of time, so it minimizes the effects on the housing industry.”