With flood insurance premiums commanding ever-higher prices, a U.S. senator recently described a hardship faced by a constituent who endured challenges with higher flood insurance costs while keeping a reverse mortgage in good standing.
The Federal Emergency Management Agency (FEMA) implemented a new flood insurance pricing methodology in late 2021 called “Risk Rating 2.0,” which was designed to price each home individually as opposed to lumping them together in “flood zones.” Advocates say this method more accurately uses modern insurance technologies and standards and makes equitable outcomes more possible.
But some lawmakers believe that Risk Rating 2.0 has led to an explosion in flood insurance premiums that are negatively impacting their constituents, including Sen. Bill Cassidy (R-La.).
Cassidy claimed one constituent will see his flood insurance premium rise from $570 per year before the implementation of Risk Rating 2.0 to more than $8,000 annually in 13 years. And Cassidy shared another story of a constituent with a reverse mortgage on his home.
“Another constituent in Montegut, Louisiana, might lose his house altogether because he can’t afford to keep it,” Cassidy said Monday on the Senate floor. “A Korean war veteran and his wife — both in their 80s — took out a reverse mortgage on their home several years ago to help pay medical bills. They live behind a 12-foot levee, but their reverse mortgage required them to carry flood insurance, which now costs him $6,500 a year. That’s on top of what they pay for homeowners insurance.”
Cassidy added that if flood insurance continues to rise, “they will need to give up their home. That’s not right.”
Some organizations have called foul on the broader claim that Risk Rating 2.0 has caused flood insurance premiums to rise. In May 2023, the National Association of Realtors (NAR) issued a response to a claim that the revised rating system would lead to higher premiums, saying it is inaccurate.
“Under Risk Rating 2.0, some NFIP rates will increase while others will decrease, depending on each home’s flood risk and replacement value,” NAR stated. “Under the previous system, all rates would continue to climb 18 to 25 percent every year until reaching $87,000 for a $250,000 home under many policies.”
Under the new system, “Risk Rating 2.0 provides more accurate, science-based rates up front so consumers can make better informed decisions,” NAR claimed. “While the old rating system hid the subsidies, Risk Rating 2.0 tells the truth about the risk and cost to insure a property so people will know before they make a decision to buy or build.”
But in December 2023, Fannie Mae reported that some premium increases could be due to the implementation of pricing changes brought on by Risk Rating 2.0, according to its national flood survey published that month.
Congress capped annual flood insurance premium hikes at 18%, but Fannie Mae noted that “these increases (pricing changes under Risk Rating 2.0) could have tangible impact on consumers.”
Congress has repeatedly faced issues in reauthorizing the National Flood Insurance Program (NFIP), sometimes waiting until the 11th hour or even letting it lapse before ultimately reauthorizing it with retroactive effect. Cassidy and other lawmakers are seeking reforms alongside reauthorization, including that of Risk Rating 2.0.
“I urge my colleagues to come talk to me about NFIP reauthorization and reform,” Cassidy said in a statement. “We are working on bipartisan legislation that fixes this mess, makes Risk Rating 2.0 transparent, and makes flood insurance affordable again. Let’s discuss a way forward.”
A condition of a reverse mortgage includes that a borrower stay up to date on the maintenance of their primary residence, as well as on property taxes and insurance. Defaulting on flood insurance could constitute a maturity event under the terms of the loan.
