by Matt Barr

I'm from the government, and I'm here to help with your flood problem

I'm working with a reporter who's doing a story about flood insurance, or lack thereof, in New Orleans. She's using my company as a resource, since we produce digital flood maps and know a little about it all.

I've encountered the National Flood Insurance Program and Congress' various ways of making it part of millions of homeowners' lives under a number of circumstances, through my background in the law, through John Stossel (who was writing about the program before Katrina, too), through having to pick my way through local building regulations while helping manage the buildout of cell site networks, and through covering the mortgage industry in the press. (Congress forgot to reauthorize the NFIP a couple years ago when it lapsed; I covered the imminent end of the world in appropriately menacing language.) So I know a little about it all, too.

You know the problem with federal flood insurance, or if you don't, you should. Here's Stossel from the link above:

In 1980, I bought some beachfront property on Long Island, N.Y., and built a house there. It was a big investment for me. The down payment took just about all of my savings, and I knew what can happen to people who build on the edges of oceans. But I took the risk because the government made me a promise.

The promise was national flood insurance. It made my house and my neighbors' homes possible. After all, no bank will give you a mortgage unless you have insurance.

Private insurance companies were reluctant to sell insurance to those of us who build on the edges of oceans, and were they to offer it, they'd charge an arm and a leg to cover the risk. But this wasn't a problem for me, because you offered to insure my house. I know you didn't do it personally, but you, as a taxpayer, are the guarantee behind federal flood insurance. Should a big storm wipe out half the coast, you'll cover our losses -- up to a quarter-million dollars. Thanks -- we appreciate it -- but what a dumb policy.

The subsidized insurance goes to affluent homeowners on both coasts -- from Malibu Beach, where movie stars live, to Kennebunkport where the Bush family has a vacation home, to Hyannisport, where the Kennedy family has a summer home, to the Hamptons, where I bought my house.

The insurance premiums were a bargain. The most I ever paid was a few hundred dollars. Federal actuaries say if the insurance were realistically priced, it would cost thousands of dollars. Why should the government guarantee water's-edge insurance? Why should the government be in this business at all?

Stossel is in the minority when it comes to buying flood insurance, though. You see different figures but this attorney for the Minneapolis Federal Reserve was saying a few years ago that only 20 percent of homeowners in flood-prone areas actually have flood insurance.

But isn't it mandatory? It's hard to decide what's most aggravating about "mandatory federal flood insurance," the way Congress reaches into your life to "require" it when nominally it's powerless to do so or how badly it fails. Government touches our lives so intimately that there's always a way to get you to do what it wants. Except, being government, it's not very good at it.

Something simple, and it can turn the screws, sure. It wants a 55 MPH speed limit? It can't pass a law mandating a 55 MPH speed limit, but no problem. It requires states to pass a law mandating a 55 MPH speed limit if they want to receive federal transportation funds. It wants certain national, uniform standardized tests to be administered to children in every different part of the country? It can't pass a law, but no problem. It requires school districts to administer its tests and report the results if they want to receive federal assistance.

The flood insurance deal is a masterpiece of failed busybodyism and elbowing everyone else out of the way to be sure people pay attention to Congress, not so much to solve pressing problems, compared to these examples. Here's how it works.

Congress wants everyone in flood-prone areas to have flood insurance.

It tells FEMA to map and designate the flood hazard risk throughout the country. You don't want to settle for "LOW RISK" and "HIGH RISK" or anything when it's someone else's money, so you cook up the following flood hazard zones:

Z, B, X, A, AE, A1-30, AH, AO, AR, A99, V, VE, V1-30, and D.

(That ought to cover everything, right? You'd think! Parts of downtown New Orleans -- the parts that were under 15 feet of water -- were designated Zone B, Moderate to Low Risk, with this annotation:

ALL ZONE B AREAS ARE PROTECTED FROM THE 100 YEAR FLOOD BY LEVEE, DIKE OR OTHER STRUCTURE SUBJECT TO FAILURE OR OVERTOPPING DURING LARGER FLOODS.

Well, yeah. The upshot is that having a major U.S. city, below sea level and hemmed in by a river, a lake and the Gulf of Mexico, completely designated high risk would be expensive for builders and developers trying to conform to local building codes [see below]. So someone lobbied to get a flood hazard designation of MODERATE TO LOW RISK for parts of New Orleans on the basis that there were levees and dikes keeping out the massive flood waters. Till they weren't. Hope it was worth it.)

We could stop there and understand why having the government run flood insurance is a bad idea. Do you think you could have lobbied State Farm into giving parts of New Orleans a break on flood insurance because there were levees and stuff?

But on. Congress wants everyone in high risk areas, which it's had FEMA map out, to have flood insurance. It considers, probably, passing a law requiring everyone who owns a home in one of those areas to get flood insurance.

It would have gotten away with it, too, if it weren't for that darn Article I of the Constitution! Congress can't pass a law requiring you to buy insurance on anything, any more than it can make you drive 55. So it has to get creative.

It establishes a federal flood insurance program. The premiums are cheaper than private, for-profit insurance -- this is 1968, when that kind of thing seemed like a good idea. But wait! If everyone is suddenly going to clamor for this federal flood insurance, we Congresspersons should really try to make sure they're taking precautions against flood damage when they build. Let's pass a law!

Can't. Darn Article I. But it can "offer" cheap federal flood insurance only if a homeowner's community "participates" in the NFIP program. It's up to you, communities! Using FEMA's flood hazard designations, amend your building codes and zoning and land-use rules to conform to the ideas of the best and brightest in Washington (itself near a river!), and we'll allow your subjects to buy cheap federal flood insurance.

This went about as well as you'd expect it would. With participation low in the mid-70s, you might expect Congress to scrap the program. You'd be underestimating the resolve of your lawmakers!

Congress moved to make federal flood insurance "mandatory." We can't bend those homeowners to our will, but we've got the banks and Fannie Mae and Freddie Mac! They made it so that you could, if you wished, continue to agree to mortgage contracts and such, free country, etc. etc. But if you were making that mortgage with a federally chartered bank -- yes, most of them -- or your lender wants to sell the loan to Fannie Mae or Freddie Mac, then they must require you to purchase federal flood insurance.

Now we've got you where we want you! Except now we're starting to burden big banks and government sponsored housing enterprises. Let's make it enough that they wag a finger at the homeowner, most of them will roll, but let's not make life too hard or cost too much money for the big banks.

Technically, your lender is required to ensure you keep flood insurance in force for the life of your mortgage. Which is a good idea; after all, in a 100 year flood plain, the standard for high-low risk, there is a 26 percent chance or better of your property flooding sometime during a 30-year mortgage. And if you're flooded out without insurance and can't pay the balance of the loan, Big Lender will have to foreclose and... well, normally, sell the property and use the proceeds to cover its losses, but if it's a flooded-out husk, everyone loses.

Except: Life of loan monitoring is not required by the law. Lenders don't have to keep up with whether you've let your insurance lapse. Knowing this, many homeowners buy the insurance to get through closing then let it lapse.

But by God, your lender is going to make sure you have insurance at closing, right? Ah... hm. Now we get to the stick the law uses to make sure lenders comply. The largest mortgage lenders today originate $50 billion or so in mortgage loans per quarter. The NFIP law says that if you, Big Lender, engage in a "pattern or practice" of flouting flood insurance laws, you can be dinged for $350 per violation -- up to a cap of $100,000 per calendar year.

You're bringing in $100,000 of revenue for one mortgage loan (if you keep it in your own portfolio). And the maximum exposure you have if you don't pay attention to flood insurance laws is $100,000 per year.

I honestly don't know what any lender does about this, but my rudimentary economic analysis is that I wouldn't spend an awful lot of time and money -- say, more than $100,000 a year -- ensuring compliance.

Fast forward to the mid-90s, and there are floods in the Midwest, for which Congressional constituents Demand Action. Let's put some real teeth into this thing! Now, you the homeowner are on the hook. Sort of:

Having flood insurance is required in order for you to receive federal relief (you thought the federal government setting up a "mandatory" flood insurance program would mean it would stop giving out federal assistance after floods? Ha ha!) if your property is damaged by flood waters -- the second time.

Say what? You don't need flood insurance the first time -- if you're flooded out, the government will help (you vote, right?), but the next time you ask for help because of a flood, we're going to make sure you have flood insurance. But won't I not need help then? Stop, my head hurts.

To put a bow on all this, too many people, I guess, were building homes near coastal areas and in other flood-prone places without buying flood insurance, so Congress stepped in to help. Now more people build on coastal and flood-prone areas because insurance is cheaper and the consequences of not having it are not so much that you'll lose everything, but that you'll get everything back and be able to rebuild on the same spot. Your megabillion dollar mortgage lender may or may not make sure you buy unnecessary federal flood insurance before you close on your loan, because it spends $100,000 a year on those little SIGN HERE flags and has no incentive to enforce Congress' will on you. And it won't really care if you keep it in force because Congress doesn't.

There's your civics lesson for today.

In the extended entry on the home page or immediately below if you're reading this on its own page I've put together a flow chart illustrating all this. I'm justly proud of how incompetent I am at using PowerPoint, and you'll see why.

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