Residents filed suit against Terra Group for negligence because of flooding and other problems
Residents filed suit against Terra Group for negligence because of flooding and other problems (J. Albert Diaz)

President Barack Obama signed into law the Homeowner Flood Insurance Affordability Act in March.

This legislation is intended as a solution to extreme flood insurance rate increases caused by the Biggert-Waters Flood Insurance Reform Act of 2012.

When Biggert-Waters was passed, the real estate market nearly ground to a halt because government-subsidized rates disappeared when a person sold a primary home. That meant that flood insurance premiums could soar without restraint.

The Homeowner Flood Insurance Affordability Act eliminates the provision that caused government-subsidized rates to disappear, provides a refund for those who already paid dramatically higher rates under that provision and maintains protections due to sunset for “grandfathered” properties built to code after a community adopted its first flood insurance rate map.

It holds annual increases for older homes in flood zones to 5 percent to 15 percent on average, with a hard cap of 18 percent until the rate reaches the actuarial rates. Owners of grandfathered second homes and commercial property also will be spared from losing their subsidized rates immediately.

The Homeowner Flood Insurance Affordability Act does not, however, stop Federal Emergency Management Agency from imposing annual increases up to 25 percent on older second homes and commercial properties.

The new law is better than the aftermath of Briggert-Waters, but it’s not clear by how much.

Although rate increases have been diminished or eliminated, that is not the case for all properties.

It is true that the devastating requirement that new owners immediately pay actuarial rates on properties that had previously enjoyed subsidized rates is gone. However, determination of flood insurance rates will remain complicated.

Everyone Else?

Properties are divided into three broad categories: Properties built before federal flood maps existed, grandfathered properties and everyone else. The “everyone else” are those who do not fit neatly into the other two categories.

Properties built before federal flood maps existed, which have long enjoyed subsidized rates, still will have to move to actuarial rates albeit at a more gradual path than under the former flood insurance law.

Grandfathered properties that were initially built to flood codes and later drawn into a higher-risk flood zone but not required to pay higher rates will keep their subsidized rates under the new law. There remain a number of concerns including how high the rates will ultimately go and what will happen to the “everyone else” category.

There also remains real concern in the local real estate market about the lack of relief in the new law for rate increases for commercial and investment properties built before federal flood maps existed.

Those properties, including second homes, will still face average rate increases of 25 percent a year until they reach actuarial rates, with no cap on the annual increase for individual properties.

Buying Time

Finally, there remain serious questions about the effectiveness of the nation’s flood maps and the flood insurance program’s rate-setting. The best Floridians can hope for at this point is that the national flood insurance program is in the spotlight and this momentum will continue to force more positive change.

The best outcome would be for FEMA to embrace the spirit of the law and become more open and accountable for how it draws flood maps and sets insurance premiums.

The repeal of many parts of the Biggert-Waters Act and the institution of the Homeowner Flood Insurance Affordability Act may give a short-term boost to the community’s real estate market, but it may not be a long-term solution.

Buyers of property today will not be penalized immediately, but they are still going to see a gradual increase in their insurance premiums. The real hope from the new law is that it buys people more time while the government revamps its flood rating procedures and also makes more room for the private market to come in with competitive policies.