Are the feds about to rain on the party?

Seemingly unquenchable consumer thirst for waterfront vacation homes and investment properties has lately been cause for celebration in Galveston, Tiki Island and on the Bolivar Peninsula.

But are the feds about to rain on the party?

Some real estate agents fear they will, as lawmakers propose sweeping legislation that could cause flood insurance costs to soar. If some proposed bills become law, it could sour buyers on second homes and cool developers to resort areas vulnerable to flooding and storms, local real estate agents say.

“It could have a bad effect,” said James Selig of the island’s Joe Tramonte Realty. “I don’t think it’s registered with everyone. From what little I know, it scares me.”

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No More Subsidies

Causing a stir is a proposed bill by Sen. Richard Shelby that would dramatically increase the cost of federal flood insurance for owners of second homes, investment properties and businesses.

Shelby, an Alabama Republican, and other lawmakers, pointing to the debt-ridden National Flood Insurance Program, are pushing a bill that would phase out government subsidies for some properties and make policyholders pay actuarial rates, which means premiums based on true risk.

So while those property owners would still be able to buy flood insurance through the federal program, their premiums could double or triple under Shelby’s proposal.

Sensational demand for coastal housing is driving the boom in Galveston, Bolivar Peninsula and elsewhere in a county seeing thousands of homes and residential lots under development.

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Another Cost

Last year, about 1,800 commercial and residential properties valued together at $330 million changed hands in Bayou Vista, Bolivar Peninsula, Galveston, Omega Bay and Tiki Island.

In the first five months of this year, 659 properties valued together at $139.8 million changed hands, according to the Galveston Association of Realtors.

But Barbara Frink, of Sand ’n’ Sea Properties on the island, said she feared a spike in flood insurance combined with worries about climbing interest rates, higher taxes and hurricanes would dissuade some buyers.

And it’s hard to believe the government is subsidizing the cost of flood insurance, Frink said.

“I think it will have a negative effect because insurance already is so high,” she said. “Frankly, I didn’t realize flood insurance is subsidized to any degree. It isn’t cheap.”

The average premium for a yearly flood insurance policy is about $400, according to the Federal Emergency Management Agency, which administers the flood insurance program.

The National Flood Insurance Program is available to homeowners, renters and business owners in communities that adopt and enforce floodplain management codes to reduce flooding.

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Actual Risk

When creating the program in 1968, lawmakers said that premiums, not taxpayers, would cover the program’s costs. Owners of homes built before 1973 were allowed subsidies with the idea they hadn’t received enough notice when their properties were mapped into floodplains. So lawmakers said they should not have to pay rates based on true risk. Some homeowners pay premiums that represent only 35 percent to 40 percent of the actual risk, lawmakers say.

The program has about 4.7 million policyholders.

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Sagging Under Debt

But the federal flood insurance program was never intended to make it easier and affordable to develop in flood-prone areas, lawmakers say.

Shelby proposed his bill as the flood program sags under debt from paying $23 billion in claims from Hurricane Katrina and other storms last year.

The proposed legislation also targets repetitive loss and severe loss properties that have flooded again and again.

In recent years, FEMA has attempted to mitigate such properties. Early next month, FEMA officials will visit 824 houses and properties here that flood frequently.

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Frequent Flooders

Between 1978 and 2004, repetitive loss properties across the nation racked up $4.6 billion in claims, according to the U.S. Government Accounting Office report. Shelby’s bill would require owners of those properties to also pay rates that reflect true risk. As repetitive loss properties are weaned from government subsidies, their owners could see premium rate hikes of 25 percent a year under the bill.

The program’s basic problem was spelled out in a GAO report issued in January.

That report determined the program didn’t collect enough in premiums to build reserves against future losses and that Congress had been forced to increase the program’s ability to borrow from the U.S. Treasury from $1.5 billion to $18.5 billion through the 2008 fiscal year to cover 2005 losses.

Shelby’s bill was approved late last month by the Senate Banking Committee but awaits action by the full Senate.

The House Financial Services Committee approved a similar measure in March. That bill also awaits floor action.

“I hope it doesn’t pass,” Frink said.

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Lawmakers are racing to reform the National Flood Insurance Program. Here’s what a bill proposed by Sen. Richard Shelby, R-Ala., may mean to you:

• Owners of businesses, second homes and investment properties would pay fair market value for flood insurance as the federal government phased out subsidies for the group.

• Premium subsidies would end for properties that have incurred flood damage in amounts that exceed 50 percent of the property’s fair market value.

• Subsidies would be phased out for properties with improvement exceeding 30 percent of its fair market value.

• Subsidies would be phased out for properties with four or more insured losses of at least $5,000 that accumulate to more than $20,000.

• Primary residences not in repetitive loss categories would not immediately be affected, but a cap on annual premium increases would climb to 15 percent from 10 percent.

• Properties near dams and levees and within a 100-year floodplain would have to have flood insurance.

• Like federally chartered banks, all state-chartered financial institutions would have to require flood insurance on mortgages of properties in a 100-year floodplain.

— Source: Senate Banking Committee