Better Flood Risk Management Through Science
An article by Jen Schwartz was recently published in Scientific American detailing why the models and methods being used by FEMA are terribly broken, and why the problems with the NFIP cannot be solved without fixing them. Many lending professionals might feel less concerned with the science behind flood plains than the effect they have on issuing and servicing mortgages. How the flood maps are drawn, however, as well as the long-term fate of the NFIP and the real risks that lenders face, are very real concerns for the mortgage industry.
It is readily apparent that the NFIP is no longer fiscally viable; repeatedly, it has needed to borrow money from the U.S. Treasury. President Trump signed a bill forgiving more than half of its debt, but that has only given it time to function in the immediate future. Based on the current rate of flood events, it will not be long before the NFIP maxes out its credit limit with the Treasury, which currently stands at $30.4 billion, once again.
Regrettably, the Senate has been unable to reach a deal that will keep the NFIP viable over the long-term. Like many problems facing Congress, there is no single, guaranteed-to-work solution. If there were, then we would see a lot more bills get passed more often. The simple explanation is that the program needs to take in more premium dollars, spend out less on claims, or both. The question is what is the best way to accomplish that, and it is here that we find members of Congress at loggerheads.
Because of the delays and frequent back-and-forth on the discussion, it could be a while before we see the NFIP truly assume a new and sustainable design.
Undoubtedly, however, the first step for any solution is to start with the facts. Right now, FEMA appears to be relying on outdated models, methods, and data to determine flood risks. The agency calculates that about 13 million people live in Special Flood Hazard Areas. According to Schwarz, however, the actual number might be closer to 41 million. If this is accurate, then there is little chance that premiums can be raised enough or payouts on claims lowered enough to make the program sustainable. For lenders, this could mean that mortgages are being issued right now for properties that will not be adequately protected against the risks they actually face.
Because of the delays and frequent back-and-forth on the discussion, it could be a while before we see the NFIP truly assume a new and sustainable design. Schwarz notes that another major flooding event, such as another high-impact storm, could force Congress to decide on raising the NFIP’s borrowing limit or forgive more debt. She also points out that there is another possible course of action, wherein the House tries to force the Senate to act by the July 31st deadline by allowing the NFIP to lapse again.
Homeowners, prospective homeowners, and small business owners ... often suffer the most when these programs falter.
While that last option is certainly possible, dramatic maneuvers might be considered generally disadvantageous in election years. The last time the NFIP lapsed, as short as that lapse was, its impact was felt. Seats in Congress will be up for grabs just a few months after that July 31st deadline, and Congressional leaders often appear to be content to keep implementing short-term fixes if they cannot reach a meaningful solution before election time.
Even so, the fate of the NFIP in both the short-term and the long-term threatens to have a major impact on mortgage lending. If history has taught us anything, it is that uncertainty in any market is bad for it. We can only hope that Congress will lift itself out of its political gridlock long enough to reach a beneficial outcome for everyone, particularly the homeowners, prospective homeowners, and small business owners who often suffer the most when these programs falter.