Real Estate: The Federal Flood Insurance program revisited

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Last time, you may remember, I wrote about the Federal Flood Insurance program. I described the program and identified various structural issues with it. Additionally, I hinted at a potential solution that Realtor-leaders, and society generally, ought to be able to get behind.

Well, “various things” have occurred since the last column. Two women named Irma and Maria made highly unwelcome visits to our region. Even before Maria’s arrival, combined losses from Harvey and Irma are expected to exceed $200 billion, making them the most costly one-two punch in history – exceeding losses from Katrina.

And then Maria decimated Puerto Rico and the Virgin Islands, leaving millions of our citizens in dire straits.

Humanitarian aid and relief must be the top priority. Yet, some people need to be looking for the hope beyond the horror – namely, what can we do to mitigate risk in the future and ideally build a better society in the process?

I humbly suggest the following solution to the flood insurance piece of the puzzle. (Now, just to warn you, I’m going to get a little bit geeky here. It is, after all, who I am. Bear with me.)

As I said in my last column, people made significant economic decisions (purchase of real estate) based on an implied assumption that subsidized flood insurance would be available beyond their ownership tenure.

That, in effect, makes the difference between the market insurance rate and the subsidized rate an asset that can be calculated actuarially and capitalized into the value of the property.

So, then, the solution requires the owner to elect either of these options.

  1. Cash Out and Credit. The government offers to pay property owners in at-risk areas an amount, over a period of years, equal to the present value of the capitalized difference between an actuarially-determined market insurance rate, and the current subsidized rate.

Upon acceptance of that offer, the government will further offer affected owners a refundable tax credit to purchase an energy efficient and LEED certified property outside an at-risk area.

But on acceptance of the offer, flood insurance (if available) for that property would be charged at a market rate. Owners would then have to decide whether to pay that market rate, be “on the risk” (the technical insurance term) personally for any future flood damages, or sell the property.

  1. The Next Claim Is Your Last Claim. Any owner of a property in an at-risk area who declined the offer described above could continue to receive flood insurance at a subsidized rate, as determined by the good graces of the US Congress (with substantial input from the national and various state Realtor associations, as discussed previously). A (i.e., one) future claim made against the flood insurance program would be settled to the replacement cost of the loss. However, subsidized insurance would no longer be available after that one claim, and the “cash out and credit” option would not be available to the property owner.

Many friends of mine from the Midwest tell me it is common sense in those parts not to build anything permanent in a flood plain. No, maybe they don’t wear the most stylish clothes. They may even have voted for You-Know-Who. But on that score, they are correct.

You can’t, morally, say to the affected property owners, “Too bad, no more subsidized insurance, you’re on your own.” To my mind, that is a taking by the government without compensation. And I believe the Supreme Court has in related cases found that to be so. We need an equitable solution that could be a win-win for the vast majority, as well as that creates a more-sound real estate market and property environment.

But this is only one piece of a much larger puzzle. The storms also revealed other deferred and sometimes hidden challenges associated with life here in southeast Florida. Fortunately, there are solutions to these issues, as well. And that will be the subject of my next column.

James Oaksun, Broward's Real Estate Geek(SM), is Broker-Owner of New Realty Concepts in Oakland Park. In addition to having degrees from Dartmouth and Cornell, he is a Graduate of the Realtor Institute (GRI). 


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