Really Bad Ideas (Part 4: Federal Flood Insurance)

As Hurricanes Harvey and Irma wreaked their havoc over the past couple of weeks, several interconnected questions popped up, the answers to which make us look, to put it bluntly, like idiots.

Why, for instance, are there suddenly so many Cat 4 and 5 hurricanes? Is this due to man-made climate change and is this summer therefore our new normal? The answer: Maybe, but that misses the point. There have always been huge storms (like the one that wiped Galveston, TX off the map in 1900, long before global warming was a thing), and barring another ice age there always will be. So the US east coast will remain one of Mother Nature’s favorite targets.

A second (and vastly more pertinent) question is why we’ve been encouraging millions of people to move into this bulls-eye in recent decades. Since 2000, Houston and surrounding Harris County have added 1.2 million people. Since 1980 Florida has added 10 million people – most of them in the coastal corridor from Miami to Fort Lauderdale.

Seems a little unwise, doesn’t it, to put tens of millions of people and millions of houses and cars where they’re guaranteed to be damaged or destroyed by inevitable future storms. But it’s not an accident. Government programs actively encourage this migration by picking up part or all of the tab for homes that are flooded by storms. The result: A massive and growing liability for future damage on top of all the other massive and growing liabilities for Medicare, Social Security, underfunded state and local pensions, etc. From last week’s Wall Street Journal:

One House, 22 Floods: Repeated Claims Drain Federal Insurance Program

Brian Harmon had just finished spending over $300,000 to fix his home in Kingwood, Texas, when Hurricane Harvey sent floodwaters “completely over the roof.”

The six-bedroom house, which has an indoor swimming pool, sits along the San Jacinto River. It has flooded 22 times since 1979, making it one of the most flood-damaged properties in the country.

Between 1979 and 2015, government records show the federal flood insurance program paid out more than $1.8 million to rebuild the house—a property that Mr. Harmon figured was worth $600,000 to $800,000 before Harvey hit late last month.

“It’s my investment,” the 49-year-old said this summer, before the hurricane. “I can’t just throw it away.”

In years past, he had considered a buyout from local officials seeking to purchase often-flooded properties. Now, he finally wants to get out. “I never want to go through this again,” said Mr. Harmon, who bought the house in 1995.

As they tally up the losses from Hurricanes Harvey and Irma, government officials are looking for ways to step up purchases of frequently-flooded houses, which have become a huge drain on the financially troubled federal flood insurance program.

Homes and other properties with repetitive flood losses account for just 2% of the roughly 1.5 million properties that currently have flood insurance, according to government estimates. But such properties have accounted for about 30% of flood claims paid over the program’s history.

The Government’s Growing Flood Problem

Can the federal government afford to insure homes that face repeated flooding? Already roughly $25 billion in debt, the National Flood Insurance Program is facing massive new claims following hurricanes Irma and Harvey. “We are seeing a very acute need to move far faster” on property buyouts, said Roy Wright, who directs the National Flood Insurance Program. “It’s a clear priority to address these multiple-loss properties.”

In a buyout program, homes are typically razed and the land left as open space.

Even before Harvey and Irma, the flood program owed the U.S. Treasury $24.6 billion, as payouts have exceeded the amount of insurance premiums it takes in.

The program paid out more than $47 billion in insurance claims since 2000, according to government figures.

Insurance payouts from Harvey alone are expected to total $11 billion, said Mr. Wright, noting the program had already received nearly 85,000 claims tied to the disaster as of Wednesday. It is too early to estimate losses tied to Irma, but Mr. Wright expects both storms to be among the most costly in the program’s history.

Florida and Texas, the two states hit hardest by the back-to-back disasters, are home to nearly one in five of the most frequently flooded properties, according to an analysis of federal flood insurance data by the Natural Resources Defense Council, an advocacy group that supports increased buyouts.

Nearly half of frequently flooded properties in the U.S. have received more in total damage payments than the flood program’s estimate of what the homes are worth, according to the group’s calculations.

“Anyone looking at this would say there are perverse incentives for staying on the floodplain,” said Nicholas Pinter, a geology professor and associate director of the Center for Watershed Sciences at the University of California, Davis, who has analyzed repeatedly flooded properties.

Mr. Wright said he has “no authority to cancel policies, none at all” when homes suffer multiple losses. The agency can, however, put “folks who have multiple losses in a position where they have the opportunity to move on rather than simply re-establish them in harm’s way” by buying these homes with federal funds, he said, and is looking at ways to expedite the buyout process.

Some flood experts say the government needs to do more. “The number of repeatedly flooded properties is growing much faster than our efforts to mitigate those properties,” said Robert Moore, a senior policy analyst with the NRDC. He believes the flood program should pre-qualify homeowners with flood insurance for a voluntary buyout if their home is substantially damaged in a future disaster.

Funding for buyouts is limited and the process can be cumbersome as it works it way between local requests, state reviews and federal approvals. “Unfortunately, the process takes two to 2 1/2 years,” long enough for many homeowners to make repairs and change their minds, said Larry Larson, senior policy adviser for the Association of State Floodplain Managers.

Homeowners aren’t the only ones who can get cold feet. Some communities are reluctant to offer buyouts because funding is limited and the program removes properties from their tax base, said Delton Schwalls, an engineer in Orlando who works with Florida communities on flood mitigation.

Some thoughts

The government buying up and bulldozing these damaged houses would seem to make the problem worse rather than better by relieving homeowners of responsibility for their decisions, which is exactly the kind of moral hazard that has led to, for instance, the current half-trillion-dollar financial derivatives market.

The libertarian (that is to say, rational) alternative would be to eliminate federal flood insurance and require homeowners to pay the full cost of the risks they take on. If an extra $10,000 a year is a deal breaker, then don’t move to a sea-level city in Hurricane Alley. Developers and local politicians would hate the resulting mass exodus but the local environment would appreciate it. Maybe the Everglades would survive in that scenario.

If this sounds heartless, it’s because the other side of the ledger is less obvious. Someone has to cover these payments and as always it’s not the poor because they don’t have the money, and it’s not the rich because they can hire accountants to minimize their taxes. This leaves the middle class holding the bad policy bag. They pay taxes because they can’t avoid them. And their savings, being mostly in bank accounts and other financial assets, can be stolen by inflation’s stealth tax.

Of the two groups – clueless homebuyers in floodplains and middle class people trying to save for retirement – the latter obviously deserves more protection. But beyond the obvious moral angle, a society with tens (maybe hundreds) of trillions of dollars of such hidden obligations is setting itself up for a complete loss of faith in its currency, making it impossible to help even those who actually deserve it.

Courtesy of Dollar Collapse