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Fugate tells Congress: It's up to you to stop rate increases for flood insurance

 Craig FugateCongress must rewrite the federal flood control act  if it wants to spare homeowners from skyrocketing rate increases, the nation’s top disaster official told a Senate committee Wednesday, saying he doesn’t have the authority to stop it.

“Let me put my cards on the table: I need your help,’’ said Craig Fugate, head of the Federal Emergency Management Administration at a hearing of the U.S. Senate Banking, Housing and Urban Affairs Committee on Wednesday.

Fugate said that despite indications that many homeowners could face massive rate increases for their homes in flood prone areas of the nation starting Oct. 1, the Biggert-Waters Flood Insurance Reform Act of 2012 included no provisions for affordability -- and he can't change that.

“Without some additional legislative support, there is no provision for affordability in this bill,’’ he said.

Fugate told the committee that he supported some modification because he has “found very little leeway as to how we can address affordability under the act.”  

“I fully believe we should stop subsidizing risk as we go forward for new construction for second homes…but we need to look at not putting people out of their homes because flood insurance is too expensive.”

The hearing was called by senators who are increasingly alarmed by estimated rate increases for homeowners as a result of the act. With nearly 2 million homeowners covered under the act, Florida may be one of the hardest hit states in the nation. 

The 2012 act was passed to keep the national flood insurance program from spiraling into insolvency by phasing out lower, subsidized rates for older properties in flood zones. 

Under the reform, flood insurance rates are expected to rise about 20 percent annually for certain in flood-zone areas that have previously enjoyed subsidized rates. For businesses and investors with vacation and second homes in those areas, the rates will rise 25 percent a year. The rate increases will continue until their premiums reflect the full market risk.

The law also requires that flood zone maps be updated, in some places for the first time in decades, a change that is shifting many homeowners into flood zones who had previously been exempt -- as well as moving other homeowners out of flood zones. Federal law requires that homeowners in flood zones carry flood insurance in order to obtain a mortgage.

But as the effective date of the reform nears, the sticker shock has hit and elected officials from both parties are clamoring for Congress to delay provisions of the act or repeal it altogether.

Florida Gov. Rick Scott, a Republican, warned in a letter to Florida’s senators on Monday that the reforms “could devastate parts of Florida’s real estate market, stymie Florida's economic recovery, and diminish the state's tax base."

Florida Sen. Bill Nelson, a Democrat, is urging his colleagues to adopt a delay.

Sen. Robert Menendez, D-New Jersey, said he saw the crisis coming when the act was passed, but his colleagues resisted attempts to cushion the rate increases. He said on Wednesday that he will draft legislation to modify the law and urged Fugate to provide him with suggestions.

Among the ideas: a means test for homeowners, giving a break to those who have received subsidies for decades but could be forced out of their homes if forced to pay the market-based rates.

In June, the U.S. House of Representatives passed an amendment to the Flood Insurance Reform Act that would delay the rate increases for at least a year. If Congress does not act by Oct. 1, anyone who purchases a home after July 2012 could see their rate increase rise from averages of $500 for $250,000 in insurance to as much as $5,000, several witnesses told the committee.

But Stephen Ellis, vice president for Taxpayers for Common Sense, a non-profit budget watchdog, urged the committee to keep in place the rate hikes which are structured to remove the subsidies and avoid a taxpayer bailout of a under-capitalized program.

“We’re seeing a lot of tail wagging the dog – extreme circumstances that are trying to dictate the overall policy,’’ he said.

The committee also heard from a series of witnesses who blasted FEMA for its failure to give people proper warning, which is having an impact on the economic recovery.

“Homes are not selling in particularly flood prone areas -- the market’s frozen,’’ said Christine Shirley, flood insurance program coordinator for the State of Oregon. “Partly because of affordability and partly because of uncertainty.”