Mortgages at Risk if U.S. Flood Program Expires

By Ben Berkowitz | September 26, 2011

The federal program that insures homes against flood damage expires next Friday and is at risk of not being renewed, even as an early fall storm threatens to inundate much of the northeastern United States yet again.

Industry executives say that if the National Flood Insurance Program lapses, it would become all but impossible to get a mortgage in flood zones across the country until the program is revived.

Insurers and lobbyists are due to meet Friday to strategize on getting an extension passed by next week, though there is little optimism something would happen in time.

The NFIP has 5.57 million policies in force nationwide, insuring $1.25 trillion in property, which would remain in place even if the program is not extended.

Yet the program is also struggling with an unsustainable debt load. A bill to reform the NFIP overwhelmingly passed the House of Representatives this summer, but a competing reform bill has made little headway in the Senate.

In the meantime, the program has continued on a series of annual extensions, the last of which expires Sept. 30. A short-term extension is part of the broader government funding bill the House passed early Friday, but Democrats have said the bill has no chance in the Senate.

“I would have thought surely we wouldn’t be going down this path again,” said Patty Templeton-Jones, vice president of operations and principal NFIP coordinator at Fidelity National Indemnity Insurance Co., which is the largest writer of flood insurance policies in the United States. The NFIP uses private insurance companies to write and administer policies on its behalf, paying them a fee for the service.

“This is absolutely getting ridiculous,” she said. “We are at this point preparing for a lapse.”

In certain designated flood areas, flood insurance is mandatory as a condition of mortgages and other loans. According to informal guidance issued by the Federal Reserve in early 2010, during a lapse period lenders can still make loans on properties that are required to have flood insurance, even if that insurance is not available.

But Templeton-Jones said that is almost certain not to happen, notwithstanding the Fed’s permission.

“They won’t take the risk at all,” she said. “There may be some small ones that may be willing to do that but the vast majority won’t put themselves at risk like that.”

The debate comes as the northeastern United States, which is just now drying out and starting to recover from Hurricane Irene last month, prepares to be slammed again.

The National Weather Service said Friday that areas from North Carolina to Massachusetts were at risk of flooding this weekend, and AccuWeather reported that the storm was already dropping more than 2 inches of rain an hour in spots.

(Editing by Doina Chiacu)

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