As a follow up to one of my previous blog posts about the drastic rise in flood insurance on October 1, I've been thinking about this quite a bit lately. I had another client that had a deal fall apart this past week because the flood insurance on their $130,000 home is now over $3500 per year. My first client found out that over the next 4 years their flood insurance would have gone as high as $7200/year! I feel incredibly bad for everyone involved. The buyer spent a lot of money on inspections, appraisals, getting ready to move etc. The seller has already moved out of the home and is in the middle of a divorce. Both agents are back to the drawing board as well.
It made me think about all the other home owners who own a home in a flood plain. What will they do now? The reality of the situation is that their home is now worth dramatically less. If the flood insurance is now $300 per month more than normal, at current rates that's equal to about $65,000 in value for the same person to be able to qualify to buy that home. When we're talking about a home that costs $130,000 that's a 50% reduction in that home's value.
Looking down the road, these folks will probably not be able to sell their homes without doing a short sale or falling into foreclosure. How many of these homes were financed with USDA and FHA backed mortgages? It seems that by FEMA attempting to make back some of the money they lost in the recent floods in the Midwest, Sandy, and Katrina they may be dramatically hurting homeowners as well as putting FHA and USDA in a pickle as well. Except that while FEMA is trying to recover $2000-$3000/year FHA and USDA may be taking very large hits if these homes go into foreclosure or short sale. Do you think we'll see an unwillingness to finance flood zone properties in the future?
We have entire communities that are built in a flood zone. This recent bill is going to dramatically affect those homeowners. Their homes will be virtually unsellable for what the majority of them owe. If they do happen to have some equity in the home it is probably now all gone unless there are major changes.
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