Flood Insurance Reform Act’s Shock Therapy

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Flood Insurance Reform Act’s Shock Therapy:
A Cure Worse than the Underlying Disorder?
By Robert Frederickson

Harvey Vengroff is moving to Belize.

As a successful businessman and investor he can afford to live just about anywhere. His companies, including Vengroff and Associates, have made him a wealthy man, primarily through work in the debt collection field. His companies reportedly manage in excess of $20 billion in debt annually.

Additionally, he owns and manages over 700 rental properties in the Sarasota/Manatee county areas. His holdings also include warehouse and commercial properties throughout the region.

He loves this area. Has lived here for years. Moved his business here. So why is he leaving?

It’s not the climate. There’s plenty of sun and surf to be found in these parts, just as in the sun-drenched paradise of Belize, located in the western Caribbean on the southern end of the Yucatan peninsula.

But the business climate? Well, that’s another story. And that’s what has him ready to light out for friendlier horizons, even if it means living the life of an expatriate American.

“The government here? It’s just stupid, some of the things they do. And it just keeps getting worse,” he said in a phone interview last week when asked to comment on the impact of the Biggert/Waters Act that has left individuals and businesses alike reeling from the dizzying heights to which their federal flood insurance premiums have risen.

Biggert/Waters was passed to close a $23 billion deficit in the decades old federal flood insurance program. The deficits are fairly recent, brought on by relief efforts tied to Hurricane Katrina, the series of storms that hit Florida in 2004 and 2005, and more recently Tropical Storm Debby in 2011 and last year’s Super Storm Sandy, both of which resulted in massive property destruction in the northeast.

But according to Vengroff and others who have their fingers on the pulse of the local economy, the cure provided by the Biggert/Waters Act is worse than the underlying pathology it was created to remedy.

“It just makes no sense,” he says.

He tells of a house on Longboat Key he once owned that recently came back on the market. “We had owned it in the past and were thinking about moving back to the key,” he said.

 “Ten years ago when we lived there the flood insurance was $5000. When my wife checked with the bank, we found out it’s now $60,000. It’s crazy.”

Vengroff could handle that type of increase without much trouble, or go without coverage entirely by paying cash. But it’s the principle that bothers him. And he worries about the plight of families that rent homes or apartments from him. “These are working class people,” he says. “If I have to up their rent by $100 or $125 per month because of higher insurance, that’s a big hit for them. That means there might not be much food in the refrigerator by the end of the month.”

The negative implications for Florida’s economy are far reaching. Especially in Sarasota, which depends so heavily on real estate transactions to fuel the broader economy.

“This doesn’t just affect the rich,” adds Vengroff. “Everyone will feel it.”

Anne Johnson has lived on Siesta Key most of her adult life, settling there with her late husband and young family in the mid-1970s. They bought a modest home not far from the village. They raised two children, enjoyed a full life on the key in what was perhaps a simpler time. But now she’s retired. The kids are grown, with kids of their own now. And with her husband gone, Johnson now finds herself with more house than she really needs.

“I’ve been thinking about down-sizing,” she said recently. “I’d like to find a place on the mainland closer to the kids.”

She hasn’t received the dreaded letter yet from the insurance company with her new rate, but worries about the effect higher premiums will have on any prospective buyers. Current policyholders will have their rates phased in over four years as the law stands now, but new owners will have to pay the higher rates immediately.

“It’s certainly not going to make it any easier to sell,” says Johnson.

Realtor Ron Noce of Key Realty on St. Armand’s Circle in Sarasota faced that very scenario recently. The sticker shock from escalating flood insurance rates could easily have scuttled a deal he had put together for a home in Englewood. “The current owner was paying around $5000 a year for flood coverage,” explained Noce. “But when the British couple that was interested looked into what they would have to pay, they got a quote of over $64,000. I mean that’s quite a jump.”

Since banks require the insurance for mortgages in flood zones (which encompass much of Sarasota County, especially to the south), lower and middle class individuals are disproportionately affected. Higher income buyers may have the option of going “naked” by paying cash to avoid the lender’s flood insurance requirement. Luckily for Noce and his seller, that’s what happened in his case. “The buyer decided to put aside some of what they would have had to pay for insurance each year so they could repair any damage from a flood on their own,” he explained.

So what should you know about Biggert/Waters if you are in the market for a home or have a policy that will be renewing soon? We posed that question to Richard Karger, a licensed property and casualty insurance agent based in Ft. Myers Beach, Florida, who quotes and writes policies statewide. In a phone interview last week, he outlined his “Karger Basics.” His perspective is based on conversations with literally hundreds of concerned property owners over the past several months.

Here is a summary of his “Karger Basics:”

1. Property owners of rental homes, non-primary homes, or commercial property can expect a 25% minimum increase per year until these properties are up to the non-subsidized true flood risk adjusted premium.  Owners of primary residences with a current flood policy in place and no history of flood claims can experience a lower rate of annual increase, subject to specific conditions of their property.

2. Arguably more compelling than the above is the fact that all homes must now be re-rated with a current Elevation Certificate, done by a licensed surveyor that measures and defines your property’s “TBF”, which is not a text messaging abbreviation.  It stands for the Top of your Bottom Floor.  Obviously this implies homes built on a slab have a lower TBF that an elevated or “stilt” house.  Your TBF is then compared to the Base Flood Elevation, (BFE) which is defined by FEMA for most island communities.  Gulf side properties have slightly lower numbers than bay side properties.  If your TBF-BFE (6’ – 15’ = -9) results in a negative number, expect a premium increase, even if this is your primary home. Many older homes have had flood policies with no elevation certificate associated with it for years, so this is another step at defining and equalizing risk and premium costs for flood policy holders.

Until Oct. 1, premium increases were based on estimates only. Since that time, real premium costs have been available.  Two such examples provided by Karger can be shared and quantified:

Property one – Commercial property, bay frontage.  Previously paid $2700 for Flood Ins., received a renewal quote of $47,000, with no change in coverage limits, amounts or deductibles.

Property two – residential single family home, secondary/non-primary home.  Previously paid $1900 and renewal quote received is $14,000 with no change in coverage.

So are there any options that could save some money or reduce the increases coming? “Yes, there are,” according to Karger, who explained as follows:

1. Congress can revoke, change, or delay implementation of the Reform Act.  While this may or may not happen, property owners have little control over this but can consider and discuss the following options with their insurance agent:

2. Raise your policy deductible amount to assume more risk yourself.  This reduces premiums.

3. Reduce the policy coverage on the contents of your property.  This is insurance on personal property not part of the dwelling.  Many are over-insured in this area according to Karger.  This reduces premiums.

4.  Reduce the policy property coverage limits, as many policy limits have grown over time or just were wrong to start with.  Get your agent to do a replacement cost estimator like those used by the insurance companies.  This can reduce premiums. Unlike homeowner’s policies, the limit for any property with a flood policy is fixed at $250,000.  Karger reports that storm surge flooding rarely destroys homes completely by itself in areas like those along the southwest Florida coast.  It’s the high winds and rain of tropical storms or hurricanes, and flooding all combined that do the most damage.

While he admits major damage is always possible, choosing a lower cover limit is more affordable, but rarely an option most agents suggest.

5. Do you have flood insurance on an “elevated” property like a condo on an upper floor, or a home with the living area all elevated properly on stilts or columns?  If so, it is possible with a new elevation certificate your premium may decline for Flood insurance.

Implications of the Flood Insurance Reform Act of 2012 for the real estate market can potentially be devastating. Property values can drop based on this new higher cost of ownership. New property buyers will automatically pay the new and higher rates, and inherit none of subsidized rates of an existing seller.  Big annual insurance premiums leave less for mortgage payments.  Flood Insurance is only payable by law with one annual payment and not monthly, quarterly, or semi-annual payments like other insurance policies.  Thinking of just not purchasing Flood Insurance?  Fine if you have no mortgage or are a cash buyer, as lenders require all necessary insurance to protect their collateral in the property.  Stop paying the flood insurance premiums and you can be in a default on your mortgage triggering foreclosures. Unfortunately, cash buyers who choose to self-insure without flood insurance are not that plentiful.

Have more questions? We hope you do.  Call a professional area Florida insurance agent, who has experience in this area for qualified assistance.

Legislative Efforts

As we were going to press, word broke that a group of U.S. Senators – including Bill Nelson, D-Fla – is preparing to add a fix for the Biggert/Waters Act to a defense authorization bill presently being debated in the Senate. The proposed amendment would freeze some rates for four-years while the originally intended (but never completed) affordability study is completed. Ironically, Biggert/Waters was originally passed in the same manner: as an add-on to a larger bill that some say prevented it from receiving the level of scrutiny it deserved.

“The National Flood Insurance Program (NFIP) was solvent until Hurricanes Katrina and Sandy but now they are running at a deficit – that’s why they decided not to continue subsidizing ‘high risk’ properties in flood zones,” explained Dan Andre, a Fort Myers Beach city councilman in a recent interview with the Island Sandpaper newspaper in that community.  “The problem is, they never did an affordability study to determine how this would affect properties like those in Florida, and they fail to take into account the fact that most of the money collected by EMA for the NFIP actually went to pay for properties outside of this state.”

Sarasota, Manatee, Charlotte and Lee counties include some of the most heavily impacted areas of the country in the amount of properties affected by this Act, and officials are concerned that property values will suffer as buyers realize they will immediately be subject to dramatically higher premiums. This has the potential to affect not just individuals, but local governments as well since they rely on tax revenues tied to property values to fund local services.

“Local Realtors weren’t even informed of this until March of this year,’ Andre said. “That’s a consequence of the fact that the affordability study was not done.”

What this Act will do is almost sinister in its simplicity. A person looking to buy a home and retire in a low lying area like Siesta Key, Venice, Englewood and even significantly large portions of unincorporated Sarasota County will face upwards of an extra $800 a month in flood insurance premiums, unless they pay cash for the property as banks require that insurance in order to issue a mortgage.

“Look at all the buildings (along the coast) – many of them are ground level and were built to standards that don’t exist anymore, “said Andre.  “Anyone in a flood plain will be affected by this – not just those with homes on barrier islands.”

“I’ve spoken to a friend in Colorado who told me that because of the recent floods there  – they will now be listed in the flood plain and thus have to adhere to the requirements of this Act,” said Andre. “What should be done instead is have each property be evaluated individually based on how many claims have been filed for that property for as long as it’s been in existence – flood insurance based on actuaries.”  

In the House of Representatives, local congressman Vern Buchanan, R-Sarasota supports efforts to delay the implementation of the Act.

If all else fails? Well, there’s always Belize, land of laissez faire economics and a tantalizingly low cost of living. Who knows, maybe Harvey Vengroff can even set you up with a nice, affordable rental on the beach.

He’s not headed there to retire, after all.

The Island Sandpaper, Fort Myers Beach, contributed to this report





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