In the Senate Banking Committee's obscure Subcommittee on Economic Policy, chaired by the Sen. Jeff Merkley, D-Ore., a drama is playing out that will affect millions of Americans throughout the country and could also influence the struggle over the threatened government shutdown and default on the federal debt.
The title of the Sept. 18 hearing was The Implementation of the Biggert-Waters Flood Insurance Act: One Year After Enactment. This is the first of three articles on the issues raised by this legislation, scheduled to take effect Oct. 1, while most of the nation's attention is focused on that other program, Obamacare, and on the possible government shutdown and default.
As Merkley explained in his opening statement, the Biggert-Waters Act was passed by the House and then tacked onto a transportation bill in the Senate. (The sponsors were Rep. Judy Biggert, R-Ill., an aggressive advocate for the insurance industry who was defeated for re-election last year, and the better-known liberal Rep. Maxine Waters, D-Calif., who is now the ranking Democrat on the full House Financial Services Committee.)
All of the senators who attended took time to express sympathy for the victims of the recent disastrous floods in Colorado. Subliminally this reminded senators that the National Flood Insurance Program (NFIP) affects communities and homeowners and small businesses throughout the country, not just on the East and Gulf Coasts. In fact, there are 22,000 participating communities and 5.5 million policyholders, with insured property and content insurance exposure of $1.3 trillion.
Given the propensity of all federal insurance programs to underprice risk, it is no surprise that this one is under water (pun intended) by $24 billion. The purpose of the Biggert-Waters Act is to reform the terms of flood insurance, in an effort to eliminate the most egregious subsidies, such as coverage of second homes and properties that have flooded repeatedly. To enable this, as Merkley stated, "Flood maps are being redrawn in many communities, resulting in mortgage companies requiring many families to buy flood insurance for the first time."
The main concerns, according to Merkley, are sudden increases in premiums from the range of $300 to $500 per year up to several thousand dollars annually, and the phenomenon called "force-placed insurance." Under the threat of penalties of $2,000 per case, if homeowners whose properties are shown as located in flood zones fail to purchase flood insurance, the mortgage company will buy it for them and charge them.
It has been alleged in other hearings that this provision creates a conflict of interest, because mortgage companies may buy the insurance from affiliated insurers at higher rates than property owners could obtain if they shopped for policies.
Merkley added that if a property is subject to drastically increased and disputed rates, this might impair the owner's ability to sell the property; this in turn could jeopardize the equity the owner has accumulated over years or decades. Another diabolical feature of the Act is that if notoriously inaccurate flood maps place a property in a flood zone, the burden of proof in a resulting dispute lies with the owner, and a survey to establish an accurate elevation can cost $500 to $2,000.
Sen. Dean Heller, R-Nev., the ranking Republican on the subcommittee followed Merkley by pointing to serious floods in Reno that caused more than $1 billion of damage in 1997 and spread over six counties, again illustrating that the impact of the implementation of the Act extend far beyond the states commonly associated with flooding. He called for improved transparency by the Federal Emergency Management Agency (FEMA) as it moves to implement Bigger-Waters.
In other preliminary statements, Sen. Jon Tester, D-Mont., said the Act raises the fundamental questions of what the role of the federal government should be and who is going to pay for federal subsidization of flood insurance.
Sen. Elizabeth Warren, D-Mass., questioned how FEMA could proceed to implement the Act when flood insurance maps have not been updated, and thousands of constituents in her state are suddenly being required to buy flood insurance for the first time as of Oct. 1. She demanded that the agency take into account the affordability of policies for low- and moderate-income homeowners.
The highlight of the first portion of the hearing was a panel of the two senators from Louisiana, Republican Sen. David Vitter and Democrat Sen. Mary Landrieu. Vitter warned, "We may be feeling it first, but this movie is coming to a theater near you, and it ain't a good ending right now." He cited a constituent who had been paying $633 per year for flood insurance whose premium is increasing to $28,544 per year to cover his $250,000 home, and more commonly, premiums in Louisiana are jumping to $10,000 per year.
Vitter announced that he has told FEMA he would have three questions for Administrator Craig Fugate. Pointedly comparing the flood insurance program to Obamacare, he called for a delay in implementation for at least a year, because, "This implementation is not ready for prime time."
Second, he called on FEMA to stop releasing flood maps until the inaccuracies could be resolved. Finally, he demanded that FEMA address the issue of affordability and called on the agency to provide the leadership necessary to straighten out the problems with the program.
Landrieu was equally vocal in her complaints, and the tone of her message sounded a lot like the grievances of Republican opponents of Obamacare. She charged that the legislation that will suddenly increase flood insurance premiums for hundreds of thousands of property owners and require others to buy flood insurance for the first time was adopted "without full consideration of the potential impact skyrocketing rates might have due to well-intentioned efforts to make the program self-sufficient, with wholly inadequate data about the affordability of the program."
Landrieu concluded, "We've got to push back, reform, repeal, get a better approach, not just for Louisiana, but for everyone in the country. Let's forget about the blame, but let's move forward together to try to fix it. We may have had good intentions, but we made a mistake, and we've got to fix it."
This is a lot like what Republican critics have tried to tell the administration about Obamacare, a program conceived by the president on a whim and forced on the country with the zeal of China's Great Leap Forward. Perhaps as the struggles over fiscal policy play out in the coming days, legislators will connect the dots and enact delays in both programs as part of the government funding and debt ceiling legislation.
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