The lead article on the front page of the January 17th – January 30th issue of the Greater Wilmington Business Journal explores the potential impact of proposed changes to the National Flood Insurance Program (NFIP) on the cost of homeowners and flood insurance. Because many residents in the greater Wilmington footprint live in flood-prone areas, and could therefore be greatly affected by the outcome of this legislative battle, it’s an important local topic to which I want to bring additional attention and awareness.
Many of you (especially those who own homes or businesses in a flood-prone area) are probably familiar with the issue at hand; but for the sake of clarity, here’s a brief bulleted summary:
• In 1968 the federal government enacted the National Flood Insurance Program (NFIP), which required flood insurance for homes with mortgages in designated flood zones. The program also provided subsidies (managed by FEMA today) to help offset high flood insurance premiums charged by the insurance companies.
• Due in large part to the damages caused by Hurricane Katrina in 2005, which resulted on more than $16 billion in claims, and Hurricane Sandy in 2012, which brought more than $7 billion in claims, the NFIP is close to $25 billion in debt. (Flood Program Puts Industries at Odds. WSJ.com; 12/20/13).
• Proposed legislation seeks to quickly phase out government subsidies and allow for substantial flood insurance and homeowners insurance rate hikes.
• Many people, especially realtors and developers, are seeking to delay the legislation because its enactment could be devastating to the real estate market.
Some of my clients in flood zones have been asking my advice about what to do, and as in most cases I tell them these important ideas to consider:
• No two people are in the exact same financial situation or share the same goals for the future, so there is no cookie cutter solution that’s right for everyone.
• The first step is education and awareness. Learn about and keep up with issues (in this case potential changes to the NFIP) that can impact your life and financial situation. Also, if you haven’t already, familiarize yourself with your current insurance coverage and premiums and try to anticipate the future possibilities based on various case scenarios ranging from best to worst.
• Talk to your financial advisor about your best options and develop a plan. Proactive preparation gives you a distinct advantage over last minute reactions.
While every individual’s situation is unique, and I would never advocate any particular action without a clear understanding of the circumstances involved, here are a couple of the main questions to begin considering:
• How high are my insurance premiums likely to go?
• How much can I afford to pay in insurance premiums—what’s the point where the premiums would be more than I could afford, or more than I am willing to pay?
• How will a large increase in insurance premiums affect the potential sale price of my home?
• Since flood insurance is only required if I have a mortgage, is it in my best interest to pay off my mortgage and drop my coverage—aka self-insure?
• Can I afford to self-insure. What would happen if a flood-related disaster did destroy my home? Can I afford to take that risk?
No one is certain exactly how this is all going to play out or how it will affect local homeowners. The important thing is to be aware that major changes and substantial price increases are a real possibility and to do some forward thinking about how potential changes might affect you and your family.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105
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