Over the last several years, the US Mortgage Industry has taken a financial hit on several fronts.  The near bankruptcy of mortgage banks and the same for Fannie Mae and Freddy Mac has created a climate of uncertainty and fear. The eminent expiry of the National Flood Insurance Program (NFIP) has triggered  more uncertainty in the mortgage industry as its reinstatement isn’t clear. The program covers homes against flood-related water damage.

Previously, Congress would extend this program for longer periods of time, stretching up to five years.  But this has recently been replaced by short-term extensions that have not gone down well with the real estate industry players. In the past year, NFIP had to be renewed three times, and this affected the operations of mortgage firms, particularly during the lapses. Industry executives have warned that, unless the program is immediately revived, many people will be locked out from getting mortgages in flood-prone areas of the US. In a bid to have the program reinstated, insurance industry representatives and other interested groups are scheduled to meet on Friday to plan the modalities of having the program extended by legislators in the coming week. Although NFIP is overwhelmed by a heavy debt burden, it has enforced policies amounting to $5.57 million, which covers property worth $1.25 trillion across the nation. The House of Representatives recently approved a bill for reforming the NFIP, although a majority of Democrats in the Senate have indicated they will not pass it.

Patty Templeton-Jones, an official at Fidelity National Indemnity Insurance Company, has expressed her disappointment at the turn of events. She sees a possibility of this program lapsing . She has also expressed doubts regarding whether lenders will be willing to take the risk of giving out mortgages and other loans during a lapse period. Templeton-Jones says that although there is a provision by the Federal Reserve to cover this, a majority of lenders will not take the risk. In 2010, the Federal Reserve issued informal guidelines that would enable lenders to continue giving loans during lapse periods on property that must be covered against floods.

The controversy has come at a time when the National Weather Service has issued a warning that areas covering North Carolina to Massachusetts will experience floods at the end of this week. AccuWeather, a leading weather forecasting media house, appeared to confirm this view when they recently reported rainfall exceeding 2 inches in certain areas along the northeastern regions of the US. Moreover, the northeastern US is just recovering from the effects of Hurricane Irene, which struck  a few months ago.

There is one huge question I have pondered for years.  If the commercial insurance industry will not underwrite a flood insurance program, why should the U.S.Government.  It’s obvious the private sector considers insuring a $20 Million Dollar Home on the coast of California or the East Coast a bad investment. A US Commercial Bank will not even consider lending you a dime for a coast line property without insurance coverage for flood. Yet, for as many times as we have seen the news and watch Coastline homes sliding into the ocean after a bad rainfall.  What you don’t see on the news is the same homes being rebuilt after the national Flood Insurance Program Reimburses the homeowner just so you can watch the home wash away the following year.  Bottom Line, this does not sound like a very profitable enterprise.

–Mike

Michael E. Dortch
President &  Managing Agent
InsureDirect.com
Corporate Home Office
618 South Broad Street
Lansdale, Pennsylvania  19446
(800) 807-0762  ext. 602