Grim(m) Waters: Will New Flood Rate Legislation Help Property Owners Stay Afloat?

Floating houseThere has been much discussion and legislative wrangling about flood insurance rates and how properties rated for high flood risk should be paying to insure that risk. In 2012, the Biggert-Waters Flood Insurance Reform Act eliminated flood insurance subsidies for those properties and sought to introduce true risk ratings for all properties needing flood insurance. This generates some huge increases in premiums for some of the most at-risk areas and could leave many affected owners unable to afford their properties and dampen home sales in those areas. Hundreds of small river towns and coastal communities in every state with significant numbers of homes and businesses in flood hazard zones are at risk. There are about 5.5 million policies in force today, about 20 percent of which are subsidized. New 2014 legislation will delay many of the increases to help minimize some of the immediate negative impact.

Congress created the National Flood Insurance Program in the late 1960s, in part because private insurers had abandoned the market. Today, in most places, it is the only option for buying flood insurance, which is required for most mortgages on any property in a flood hazard zone. There are two ways that insurance rates can be affected. First there is the system used by the NFIP to rate properties according to their base flood elevation (BFE) and the lower the elevation level, the higher the risk for those properties. Many insurers are now requiring elevation certificates at renewal. Another way is through Flood Insurance Risk Maps or FIRM. New FIRMs are being issued nationwide. When the new FIRMs take effect, some residents and business owners will learn that their properties’ flood risks have changed and that their homes or buildings have been mapped into high-risk flood zones. In order to combat the cost of higher premiums for these properties, the government has previously provided subsidies on the high hazard properties or on those that were built before the flood rate maps were drawn in 1975, also called Pre-FIRM properties. Previously, these properties were allowed a “grandfathered” rating offering lower and subsidized premiums. The 2012 legislation was enacted in an effort to eliminate the large accumulated debt carried by FEMA through the NFIP after recent significant storm claims, in large part from Hurricane Katrina and Superstorm Sandy. The law eliminates grandfathering and subsidies for the flood hazard areas. Legislators felt the rates should reflect the true cost of the risk and wanted to use the increased premiums to reduce the Programs’ debt.

However, in response to an outcry by property owners who sometimes have seen their flood insurance bills increase by 5-10 times current premiums, new legislation signed in early March by President Obama reverses or postpones some of the increases from 2012. This new 2014 Grimm-Waters bill will allow for gradual increases to the full actuarial rates, restoring the “grandfathering” and capping annual increases between 5%-15%. Still, some secondary homes or businesses and severe repetitive flood claim properties will see premiums increase by 25% annually until the actual targets are met. Although the new legislation was signed, it will take FEMA and the insurance carriers several months to put the reduction policies in place. The new legislation also calls for refunds of increased premium payments generated under the existing legislation. Property owners are eligible for a refund once the new requirements are processed.

Some communities, like Charleston, SC, have undertaken proactive ways to improve their flood rating and help residents lower their premiums. The National Flood Insurance Program’s (NFIP) Community Rating System (CRS) is a voluntary incentive program that recognizes and encourages community floodplain management activities that exceed the minimum NFIP requirements. Communities are given certain points for public information or city regulations, for example, and then given a rating. A decrease for a community’s class rating can translate to as much as a 20% savings in premiums.

Flood insurance is necessary for many communities in these hazardous waterfront zones. Legislators are working to balance the cost for the affected individuals with the burden to the taxpayers for carrying flood subsidies. Certainly, the goal is to minimize the economic impact that higher premiums have on the housing market and help property owners keep their heads above water… It is a work in progress as they put these regulations in effect.

Obama’s MyRA: A Short Recap

myRAIn his recent State of the Union speech, President Obama introduced a new program of retirement saving for the 50% of Americans that do not currently have employer-funded retirement plans. This MyRA, as it is called for “My IRA”, allows workers to contribute up to $15,000 in a starter-saving plan that exclusively uses government Treasury Bonds. The accounts offer guaranteed principal, tax-free withdrawals of principal and no fees. Couples with an adjusted income of $191,000 or less and individuals with $129,000 or less may contribute after-tax a maximum per-year of $5,500 or $6,500, if older than 50. Once the account reaches $15,000, principal can be transferred to a traditional IRA or withdrawn without penalty for other uses. Any growth earned in the account will face a 10% withdrawal penalty if taken before age 59.5. Self-employed workers are not candidates for these accounts.

As a way to encourage saving for those workers who currently are not offered another vehicle, the rates of return on the bonds are running at an average of 3.6%, which is superior to standard bank savings accounts or CD’s. Other incentives for using the MyRA as a short-term saving plan include the fact that the principal is guaranteed, there are no fees and no withdrawal penalties on principal. This could  encourage workers to get in the habit of automatically deducting contributions directly from a paycheck for savings or used as a potential way to accrue a home down-payment or emergency fund. It requires little to get started – $25 initial minimum, and then allows deductions of as little as $5 per paycheck. Also, because the Treasury Bonds are the only investment, there is no education or decision-making required. Workers can easily transfer their account from employer to employer, either for full-time or part-time jobs.

The detractors maintain that this is simply a new market for buying Government bonds to fund overspending and to unload the Treasury Bonds purchased under the Obama administration’s recent policy of “quantitative easing”,  where the Fed  has purchased large amounts of Treasury bonds to help contain interest rates and encourage growth. Also, rising interest rates would have a major negative effect on the value of 30 year bonds. Others point out that this program is inadequate to overcome the estimated $6-8 trillion in retirement saving shortfalls and that concentration should instead be on fixing Social Security. There are no tax deductions for these contributions and the government gets to use your money and keep it from being invested in higher-earning choices. Also, employers are not required to offer this plan and it is unclear how the program will launch at its predicted start-date at the end of 2014.

There appear to be some benefits to using this as a short-term savings plan and it may act as an incentive to encourage personal savings, but it falls far short of the intended fix for under-funded retirement accounts and is an unlikely fit for most DWM clients. It provides little tax benefits and the only investment option, long-term treasury bonds, is not a good one. Further, it can certainly be argued that the spotlight should be on fixing the other government-sponsored and non-voluntary retirement savings program – Social Security.