The Housing Scene

Flood Pool Is Underwater

Consumers looking for coastal real estate quickly learn the difference between an "ocean peek" unit and an "ocean view." A "peek" apartment is on the lower floors and offers only an obstructed view of the water, so it is less valuable. But the peek can sometimes become a view, and the unit's value may not be enhanced at all. In fact, quite the contrary.

What we're talking about, of course, is what can happen if your property is unlucky enough to take a hit from Mother Nature in the form of a hurricane. The results can be pretty devastating.

Take the case of a mid-Florida building about 50 yards from the Atlantic Ocean, where a friend (who asked to remain nameless) owns an apartment. When struck full-on by two hurricanes a few weeks apart in 2004 -- Frances and then Jeanne -- his unit and others were heavily damaged and the building's lobby became a swimming pool.

While you may believe the chances of a hurricane, tornado or other natural disaster are slim, their effects are being felt in the government's National Flood Insurance Program (NFIP). Even the general rise in sea level is having an impact.

The insurance pool, if you will pardon the pun, is already underwater -- and projected to become even more so.

In fact, if you don't have flood insurance, or not enough to satisfy the NFIP requirements, Uncle Sam allows lenders to place expensive flood insurance on properties on which they hold the mortgage. And guess what? Lenders don't pay the premiums; you do -- and the rates are often much higher than if you purchased coverage yourself.

The New York State Department of Financial Services has a short and sweet explanation of the process:

"Force-placed insurance, also known as creditor-placed, lender-placed or collateral protection insurance, is an insurance policy placed by a lender, bank or loan servicer on a home when the property owners' own insurance is canceled, has lapsed or is deemed insufficient and the borrower does not secure a replacement policy. This insurance allows the lender to protect its financial interest in the property."

New York regulators have some direct experience with the problem of rapidly rising sea levels. One of the buildings where it has offices along the riverfront in Manhattan's Battery Park was extensively flooded by Hurricane Sandy.

But as it turns out, rising water in the Battery Park area has been tracked for a long time. In the last century, the level of the water there has risen nearly 12 inches, according to the National Oceanic and Atmospheric Administration. While that doesn't sound like much, an extra foot of water flooding your property adds geometrically to a storm's destruction.

Flood damage, which can run into the tens of the thousands of dollars, isn't always caused by storms. Sometimes the cause is a broken pipe, or a major rain storm. And who pays for the necessary repairs depends on whether or not you have flood coverage, which isn't included in your homeowner's policy.

With the passage of the Biggert-Waters Flood Insurance Reform Act in 2012, Congress decided that the federal flood insurance program should be actuarially sound, meaning the premiums collected should be enough to pay for the insurance claims the program paid out.

The NFIP's current deficit has been estimated at anywhere between $24 billion and $28 billion. And that's only going to increase. But shortly after the Biggert bill went into effect, consumers began to squawk when their premiums rose, some to as much as $28,000 a year, according to the National Association of Realtors.

When the screaming became loud enough, the mortgage and real estate businesses lobbied successfully to obtain relief from big jumps in premiums. And just two years after lawmakers passed Biggert, they backtracked a bit by passing the Homeowner Flood Insurance Affordability Act, which set limits on how much premiums could increase in any one year.

Now, premium increases are limited to 25 percent annually until the full actuarial rate is reached. People who buy existing homes or condos fall under the same formula. But buyers of brand-new units in flood-prone areas must pay the full cost from the get-go.

Even then, the flood insurance program may never be self-sustaining.

A study commissioned by the Federal Emergency Management Agency (FEMA) has some pretty stark projections on the increase in the number of flood insurance policies and the cost of claims in this century. It attributes 30 percent of the increases to added population and 70 percent to climate change.

"Under the assumption of a fixed shoreline, the total number of NFIP policies may increase by approximately 100 percent by the year 2100, with the number of riverine policies increasing by about 80 percent and the number of coastal policies increasing by as much as 130 percent," the FEMA study said. "The greater number of coastal policies is the result of the enlargement of the SFHA (Special Flood Hazard Area) caused by sea level rise."

In addition, according to the report, the average loss cost per policy could increase 50 percent and the average premium rise by 40 percent.

Information on the NFIP is available at FloodSmart.gov.

(Freelance writer Mark Fogarty contributed to this report.)

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