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Mortgage lending could be halted by flood insurance program’s expiration, experts warn

The program is set to expire on September 30, and certain organizations are preparing for a lapse alongside a possible government shutdown

Five days remain in the currently authorized National Flood Insurance Program (NFIP). If it is not reauthorized by Congress before that date, the mortgage industry could see consequences, including ceding control of certain land use policies and the cessation of some mortgage lending.

This is according to government researchers, other experts and lawmakers in a U.S. Senate Banking Committee hearing earlier this month. While certain experts and associations have been sounding the alarm on the potential lapse of NFIP for some time, the impacts are coming into clearer view alongside the increasing likelihood of a government shutdown.

“When property owners invest in loss mitigation, they should be promised access to coverage and relief on their premiums,” Douglas Heller, director of insurance at the Consumer Federation of America, said to the Banking Committee earlier this month.

Heller added: “This discussion must include issues of property development, affordable housing and equity as we try to adapt to climate risk. If we don’t take on those larger questions, then insurance companies will be the ones left in charge of land use and housing policy through their rate-making and underwriting decisions.”

According to a report prepared by the Congressional Research Service (CRS) earlier this month, there would be several immediate impacts following the program’s expiration.

“The authority to provide new flood insurance contracts will expire,” the CRS report said. “Flood insurance contracts entered into before the expiration would continue until the end of their policy term of one year.”

The borrowing authority of NFIP from the U.S. Treasury would also be reduced from $30.245 billion to $1 billion. Flood mitigation assistance grants would still be available, but “the expiration of the key authorities listed above would have potentially significant impacts on the remaining NFIP activities,” the CRS explained.

There would also be a chilling effect on the mortgage industry, according to experts and lawmakers.

“By law or regulation, federal agencies, federally regulated lending institutions and government-sponsored enterprises must require certain property owners to purchase flood insurance as a condition of any mortgage that these entities make, guarantee, or purchase,” the CRS report said.

Without NFIP, mortgage activity would be seriously diminished, as Sen. John Kennedy (R-Louisiana) stated.

“If for some reason the flood insurance program expires, existing policies are still in effect until their expiration date, and claims will continue to be paid as long as FEMA has money,” Kennedy said on the Senate floor on September 13. “However, the federal requirement that you have to purchase flood insurance under certain circumstances to get a mortgage would be suspended, which means that many mortgage companies would not loan the money to homeowners.”

In previous instances when NFIP lapsed, mortgage activity was temporarily halted. However, according to the CRS report, Congress eventually moved to reauthorize the program retroactively.

“In past NFIP lapses, borrowers were not able to obtain flood insurance to close, renew, or increase loans secured by property in [a Special Flood Hazard Area (SFHA)] until the NFIP was reauthorized,” the report said. “During the lapse in June 2010, estimates suggest over 1,400 home sale closings were canceled or delayed each day, representing over 40,000 sales per month. These figures applied to residential properties, but commercial properties were also affected by the NFIP lapse.”

The National Association of Realtors (NAR) has prepared an FAQ document to advise members of the potential impacts an NFIP lapse would have on the housing industry. They specify that a currently debated continuing resolution (CR) that would fund the federal government after September 30 includes an NFIP extension. Still, political observers and some in Washington are preparing for government funding to lapse.

The White House on Friday instructed federal agencies to prepare for a shutdown, according to reporting from the Associated Press.

“With the October 1 start of a new fiscal year and no funding in place, the Biden administration’s Office of Management and Budget began to advise federal agencies to review and update their shutdown plans, according to an OMB official,” the AP report said. “The start of this process suggests that federal employees could be informed next week if they’re to be furloughed.”

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