This past Tuesday, Senator Mary Landrieu proposed an amendment to the Water Resources Development Act that would stop the implementation of National Flood Insurance Program (NFIP) premium increases that Congress imposed last year. Senator David Vitter is co-sponsoring the amendment.
However, both agree that the NFIP needs to be self-sustaining. Thus, Louisiana’s Senators are agreed first, that the NFIP should pay for itself, and secondly, that this should not result in massive premium increases that spur voters to kick their keisters out of office.
At first blush, it sounds like Louisiana’s Senators are saying that chocolate should taste good but shouldn’t make you get fat. That’s not quite the case.
The NFIP was created in 1968 (a banner year for responsible federal policy) to subsidize flood insurance in at-risk areas. Unfortunately, in the 45 years since the NFIP was created, the real estate market has evolved around it. Expectations have been created. Values have been established. Whether it was a wise policy at the outset has become irrelevant. What matters is that it can’t be changed abruptly without a great deal of upheaval.
Although much of Uptown New Orleans lies on the “sliver-by-the-river,” large swaths remain in flood zones and real-estate values are high. Substantial premium increases would price some people out of their homes. For others, it would at least make them cut back on spending, resonating throughout the local economy.
On the other hand, the flood risk of your average home in Uptown isn’t excessively high, and it has been developed for over a hundred years — long before the NFIP was established. However, in other parts of the country developments have gradually occurred that wouldn’t have been cost-effective except for federal subsidization of flood insurance.
In economics they call this the problem of “moral hazard,” referring to situations where a person will take risks because somebody else will bear the cost. Developers, real estate investors, your average homebuyer – they’re interested the brass tacks, in price and profits, not in abstract notions of civic responsibility or in some hypothetical actual value.
This is the reason why politicians are agreed that the gravy train needs to end. It’s distorting the market and enabling wealthy freeloaders. At the same time, the NFIP wasn’t created simply because the government enjoys throwing money around (although it does). In fact, it was created with the best of intentions. Until the 1950’s, homeowner’s insurance generally covered flood damage. However, insurance companies shifted flood coverage to a separate rider or policy following major flood events, and later determined that the economics didn’t justify offering it at all. The government entered in response to what it perceived as an unmet need.
The problem is that if the government hadn’t intervened, the market would have (presumably) eventually adjusted. Flood insurance rates would have been substantially higher, but those increased premiums would have been reflected in real estate prices and, in turn, in monthly mortgage premiums. Thus, we’ve been trading low flood insurance rates for higher mortgages.
That’s why Landrieu is right – both to advocate that the NFIP should ideally be self-sustaining, and to argue that these rate increases are wrong. Homeowners are normally tied into 30-year mortgages, mortgages that were set, in part, on the presumption of the continuation of generous federal subsidies for flood insurance. Sure, people should not generally rely on the continuation of government policy, but we’re not speaking of individuals here. We’re talking about entire real estate markets. We’re talking about a mess the feds need to own.
The NFIP is deep in debt because it is flawed policy based on a flawed model, but the increases proposed last year to correct the error invite too much collateral damage. Any reforms to the NFIP need to be highly incremental. Otherwise, places like Uptown New Orleans will be the grist for the mill of reform.
Owen Courrèges, a New Orleans attorney and resident of the Garden District, offers his opinions for UptownMessenger.com on Mondays. He has previously written for the Reason Public Policy Foundation.