Why It Matters

A new Congressional Research Service (CRS) Insight titled “What Happens If the National Flood Insurance Program (NFIP) Lapses?” examines the consequences of an interruption in the federal flood-insurance program. The report was updated on September 11, placing the issue against an authorization that currently runs through December 11. The program is the primary source of flood-insurance coverage for residential properties in the United States, with nearly 4.5 million policies and almost $1.3 trillion in coverage. That scale puts the policy question beyond the mechanics of renewing a federal program, because an interruption could affect borrowers, lenders, home sales, and commercial property transactions.

For Congress, the central tension is between repeated short-term extensions and the need to preserve access to insurance required for some federally connected mortgages.

The Big Picture

The National Flood Insurance Act of 1968, Title XIII of P.L. 90-448, as amended, authorized the program, but the law does not provide one comprehensive expiration, termination, or sunset provision for the entire NFIP. Instead, the report distinguishes among authorities, noting that other NFIP activities would technically remain authorized after specified authorities expire. The mandatory purchase rule applies to residential and commercial properties in a Special Flood Hazard Area when those properties are located in an NFIP-participating community. The report defines that area as having an estimated annual flood risk of at least 1 percent, and says that more than 22,700 communities in 56 states and jurisdictions participate in the program.

Private flood insurance may satisfy the purchase requirement when it meets statutory conditions, and the private market is growing, although NFIP coverage still generally satisfies the rule. The report also clarifies that lenders, rather than the Federal Emergency Management Agency (FEMA), enforce the mandatory purchase requirement.

The Bottom Line

During the June 2010 lapse, estimates indicated that more than 1,400 residential closings were canceled or delayed each day, representing more than 40,000 home sales per month. Commercial properties were affected as well, even though the cited closing figures covered residential properties. The NFIP was extended 17 times between 2008 and 2012 and lapsed four times during that period: March 1–2, 2010; March 29–April 15, 2010; June 1–July 2, 2010; and October 1–5, 2011.

During earlier lapses, the Federal Deposit Insurance Corporation issued guidance to lending institutions, the Federal Reserve issued informal guidance to lenders, and FEMA usually provided guidance for the Write Your Own program.

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