Parts of Texas are well-versed in the problems caused by serious floods. The Texas Gulf Coast is among the country's most hurricane-prone regions, and the river valleys that sweep through Austin, McAllen and other sizable towns can act as accelerators for rushing floodwaters during periods of heavy rain.
Recently, unusual weather patterns have concentrated the attention of the home-owning public on the shortcomings of the state's flood insurance system. Homeowners, real estate professionals and lenders should keep a close eye on pending changes that could change the economic calculus of owning homes in flood-prone areas.
Background on Flood Insurance
Federal regulations require homeowners who live in "flood hazard zones" to obtain flood insurance until they own their homes free and clear. While this arrangement is designed to protect lenders that operate in flood-prone areas, it's also crucial for homeowners who might not otherwise be able to replace their possessions and rebuild their homes after suffering serious flood damage. Since flood damage can be catastrophic in densely populated coastal areas and river valleys, federal and state governments have long provided subsidies to the homeowners who purchase it.
Flood Hazard Zones
Flood insurance requirements are made on the basis of "flood hazard zones" that are drawn, reexamined and redrawn on a periodic basis. There are two broad types of flood hazard zones: high flood risk and low/moderate flood risk. They're broken down as follows:
- A/AH/AE/AO Zones: These high-risk sub-zones have a 26 percent chance of taking on floodwaters over the term of a 30-year mortgage.
- VE Zone: This high-risk zone has a similar chance of seeing a damaging flood and may also be at increased risk of devastating coastal storm surges.
- Shaded X Zone: Shaded X areas lie on the margins of high-risk zones and are viewed as posing an intermediate level of risk.
- Unshaded X Zone: These areas are deemed to have low but non-negligible risks of flooding.
In the majority of cases, homeowners who live in A/AH/AE/AO or VE Zones are required to carry flood insurance for the full term of their mortgage. While residents of X Zones aren't generally required to carry insurance, one in five flood claims originates from these areas. As such, homeowners who wish to protect their homes and belongings have a strong incentive to obtain insurance.
The Biggert Waters Act of 2012 promises to make life even more difficult for homeowners and lenders. This new law aims to shore up the still-depleted Federal Flood Insurance Program by eliminating federal subsidies for many homeowners who live in flood-prone areas. The law will be phased in gradually over the coming years.
What Does This Mean for Regular Homeowners?
For homeowners who must carry flood insurance, the Biggert Waters Act is virtually certain to result in premium spikes. While most homeowners will see gradual increases over a period of several years, the change will be still be jarring: One study found that out-of-pocket premiums in Texas could rise from $2,000 in 2011 to $15,000 by the time the law has been fully enacted. Homeowners faced with immediate premium spikes could be forced to make some tough decisions.
Potential Effects on Lending and Delinquency
The paring of federal flood insurance subsidies could put lenders and real estate professionals in a bind. Homeowners who can no longer afford flood insurance may be forced to stop paying into the system and risk running afoul of federal law. Lenders may have no choice but to initiate foreclosure proceedings on these borrowers and accept substantial losses.
By the same token, cash-strapped borrowers could prioritize flood insurance payments over their mortgage outlays. This would put lenders in a similarly tough position and could cool the industry's appetite for new mortgage loans on flood-prone properties. As Texas flood insurance rates rise, the state's vibrant real estate industry could turn into a big liability for its broader economy.
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