Will federal flood insurance impact real estate market?

Overflow crowd gathers to soak up some concrete answers
A full-house crowd of more than 200 real estate professionals packed the Cape and Islands Association of Realtors auditorium in Yarmouth during Monday's flood insurance presentation. New federal legislation has remapped flood zones and dramatically change

The flood waters might not be rising this coming June, but the flood insurance rates sure are. Well, maybe.

More than 200 real estate agents packed the Cape Cod & Islands Association of Realtors conference room Monday, in a standing room only session, to learn exactly what this change means for buyers, sellers, and the real estate industry.

Change, impact, uncertainty

"It is definitely going to have an effect on the market," said Dante DiMassa, Bank of Cape Cod's Vice President and Director of Residential Lending, who moderated the afternoon session along with speakers Douglas McDonald, president of Murray McDonald, Michael Fabbiano, principal of High Point Engineering, Ralph Cataldo owner of Cataldo Customer Builders, and Richard Morse of the law firm Morse & Newell.

This week the uncertainty increased as US Rep Maxine Waters (D-CA), whose name appears on the act, introduced efforts to "fix" it, including potentially delaying the start date of the bill's mandates for two years or more.

1968 begat 2012

Panelist MacDonald, from Cape-based insurance firm Murray MacDonald, brought some context to the Flood Insurance Reform Act of 2012.

The act, which purportedly will slam some property owners with 500% rate increases and has thrown a blanket of confusion over properties across the Cape, has roots reaching back almost 40 years.

Creating the problem

In 1968 Congress passed the National Flood Insurance Act, intending to help people who had been hurt by natural disasters. However, it quickly spawned its own unintended consequences.

The original federal legislation covered losses on properties that had previously been considered uninsurable. Its logic went something like this: if we require flood insurance on federally backed mortgages in a flood zone, there will be lots of properties in the pool and that will minimize the risk.

But. But.

The insurance ended up working at cross purposes; instead of helping existing property owners in crisis, it instead encouraged construction in high risk areas.

With federal safety nets below, banks could - and did - finance higher risk locations previously rejected by the insurance industry as uninsurable. The resulting and inevitable losses created today's $38 billion fund deficit.

Wake up call

The 1992 Hurricane Andrew in South Florida brought the first big wake up call. It created $26 billion in damages, mostly from wind. Bond rating companies told insurance companies their ratings would drop; they carried too much risk.

Insurance companies began to flee the market -- and here in Massachusetts we saw the emergence of the FAIR plan, state managed insurers of last resort.

Wake up shout

After 2005's Hurricane Katrina and four other major hurricanes that same year walloped the country with $100 billion in damages, private firms and the federal government haggled in court over who held the bag -- and the flood insurance ship began to lilt badly.

Ship under steam

It remains unclear what outcome this week's proposals in Congress may bring, but based on the 2012 legislation, the flood insurance landscape has changed, literally.

For the past 38 years, the coastal real estate industry has been guided by 1974 maps created with low levels of detail; maps featured few roads or structures and many errors. The maps also created a baseline in time that divided the property world into pre-1974 and post-1974 categories for insurance purposes.

This past May, the Federal Emergency Management Agency (FEMA) published new maps, followed by 90 days of public comment. The new maps are detailed and explicit, and have forced a sometimes shocking rethinking of flood zones.

In January, Congress removed subsided rates for pre-1974 properties. In October rates began rising (or in some cases shrinking), up (or down) 25% a year until they reach actuarial balance rates. Also in October, all new policies are being written at full price. Next June, the new flood maps go into effect and properties ratings will change based on those.

Know the facts

"Get the facts first - get an accurate elevation certificate," said panelist Fabbiano from High Point Engineering.

Each speaker emphasized the importance of a current and correct elevation certification as the baseline for understanding how a property will be impacted by the changes.

MacDonald shared a link his firm has put together, that includes pointers to flood maps and information on those elevation certificates.

Building changes mitigate insurance costs

Fabbiano highlighted the importance of looking at logical building changes, rather than simply reacting with panic to flood map changes.

He said that a one-time investment in updating pre-1974 properties to current building codes or raising the height of the property might bring double benefits of less risk and less costs.

Not unreasonable

Cataldo echoed that message, showing slides of waterfront properties before and after the addition of break away panels, pilings, and other retrofits ... along with slides of Hurricane Bob and other storms near the same locations.

"All theses codes are there for a reason," he said, "To protect both insurers and owners."

The solution, he added, is to design and build for this reality.

Course of appeal

Appeal routes exist. Fabbiano introduced the three alphabet soup terms BFE, LOMA and LOMR-F, which form the structure of changing a property's designation.

BFE, or base flood evaluation, documents the elevation of the property. LOMA - Letter of Map Amendment and LOMR-F Letter of Map Revision based on Fill, form two methods for documenting why and how the property differs from its definition on the map.

"The FEMA maps are all available online and indexed down to detail street level," he said, including the ability to put in an address and go to both new and old maps.

Rubber meets road

Bottom line? Anything that creates uncertainty or adds costs impacts real estate - the industry as well as property buyers and sellers, both commercial and residential. The new flood insurance regulations certainly do that.

In June 2014 changes go into effect - and have ripple impacts into the future. The best course of defense right now lies in getting accurate data on the property in question - its elevation, its old and new map locations, and its build and rebuild dates, and using those to focus on how the changes apply on a case by case basis.

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