In Case You Missed It

A Taxpayer Dike for Flood Insurance


 

Washington, June 26, 2017 - June 23, 2017

A classic example of government dysfunction is a federal insurance program that helps pay to drain basements in millions of America’s second homes. Congress has tried for decades to fix the national flood insurance program, and the latest worthy attempt is coming from the House.

The Financial Services Committee recently passed bills updating the Federal Emergency Management Agency’s (FEMA) flood insurance program, which runs out of money on Sept. 30. The 1968 program insures more than $1 trillion in property, with about five million policies in 2016 for those who live in areas prone to flooding. The program is more than $24 billion in debt.

One reason for the hole is that about 20% of policies are directly subsidized. More than 75% of such policies are in counties in the top 30% for home values, according to a Government Accountability Office analysis, and many dot the affluent coasts of Florida, California and Texas. In other words, this is a wealth transfer from low and middle-income families to the folks who own real estate on Nantucket.

A 2012 law phased out subsidies when a home is sold to a new owner, among other improvements, though the real-estate lobby staged a meltdown. A Republican Congress repealed the measure in 2014 and instead hit all policy holders with a new surcharge.

Financial Services Chairman Jeb Hensarling fought the repeal and is now pushing this rock up the hill again. A House bill from Rep. Sean Duffy (R., Wis.) would require 8% annual premium increases for certain policies, and premiums are supposed to be a proxy for liability.

The bills force FEMA to raise collection rates for a reserve fund by 1% each year until there’s more cash to weather the next Hurricane Sandy or other big payout, as law requires.

The House bills also remove barriers to private competition. This would be great for families on the plains of Kansas, who subsidize policies in more risky areas. More alternatives also help reduce the federal balance sheet. One bill would remove a regulation that forbids a company from selling both government and private insurance instruments, and another would clarify that private insurance can meet standards for mortgages.

Another good idea is shutting off the spigot for new subsidies. The House package would bar policies for certain expensive or risky new homes, effective 2021. FEMA would be required to disclose how the agency calculates premiums, and it would have to improve transparency and risk modeling for maps, which are closer to Lewis and Clark’s trail guides than Google Earth.

If these changes seem modest, they read like Ayn Rand compared with ideas in the Senate, where Marco Rubio (R., Florida Gold Coast) and Elizabeth Warren (D., Cape Cod) have teamed up to protect rich homeowners. Their plan would suspend interest on the program’s debt, among other plugs. An open question is whether any improvement can pass the Senate Banking Committee, where Republicans with a one-vote majority will have to persuade Senator John Kennedy of flood-prone Louisiana.

Congress will have to pass something by the fall or risk a lapse that disrupts the real-estate market. The best reform would be to convert the program into a private operation, though Members of both parties would pile together like sandbags to block it. So credit to Mr. Hensarling and his colleagues for proposals that would at least start to impose some market discipline.

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