Flood Insurance

House Democrats' Housing Bill Includes a $20 Billion Bailout of Federal Flood Insurance

A bill intended to make America's housing stock more climate-resilient also includes a big effective subsidy for the properties most exposed to the risks of climate change.


House Democrats' new housing bill devotes billions of dollars in new funding to making America's housing greener and more climate-resilient. It also spends much more money bailing out coastal homeowners most exposed to the rising sea levels caused by climate change.

Tucked away in the 135-page, $330 billion dollar legislation released by the House's Financial Services Committee yesterday is a provision that would wipe away all the debt the Federal Emergency Management Agency (FEMA) owes to the U.S. Treasury to cover the losses from its National Flood Insurance Program (NFIP). That amounts to $20.5 billion in debt forgiveness.

NFIP, created back in the 1960s, offers low-cost insurance to homeowners in flood-prone communities. Because the premiums paid by homeowners don't cover actual flood risks to their properties, the program has continually had to borrow from the Treasury to cover its losses.

The gap between what the program collects in premiums and what it's had to pay out to policyholders has increased markedly in recent years thanks to more intense coastal development (which is effectively being subsidized by the NFIP) and more frequent flooding.

By 2017, the NFIP had accumulated $30 billion in debt to the Treasury. That same year Congress passed a bill wiping out $16 billion of that debt. But continued borrowing since has left it $20 billion in arrears.

House Democrats are now proposing to wipe the slate clean once again.

Typically bailouts of the NFIP have come when the program was about to hit the limits of its borrowing authority, says Ray Lehmann, a senior fellow at the International Center for Law and Economics. That's not the case today, given that the NFIP still has about $10 billion in borrowing authority.

"This is just straight out deciding bygones will be bygones. We're going to pretend there was never any debt to begin with," Lehmann tells Reason. "It's a shame that this is happening because there remain enormous structural problems with the program."

According to a February study from the First Street Foundation, NFIP premiums would need to be 4.5 times higher to cover the economic risk posed to properties with substantial flood risk. So long as that gap remains, taxpayers will continually have to bail out the NFIP.

There are some modest reforms in the works.

Come October, FEMA is supposed to roll out its Risk Rating 2.0 plan, which would raise premiums on some properties where the risk of flooding has increased. The rate at which these premiums can increase is nevertheless capped at 18 percent per year for most properties. Lehmann says this would mean it could take years until some properties are charged actuarially fair rates.

Even this change has proven politically controversial on both sides of the aisle. Senate Majority Leader Chuck Schumer (D–N.Y.) has called for canceling Risk Rating 2.0. Sen. John Cornyn (R–Texas) earlier this week requested that the plan should be delayed.

"Our nation is still recovering from the pandemic, and thousands of families are struggling to make mortgage payments and keep food on the table," wrote Cornyn to FEMA Administrator Deanne Criswell on Tuesday. "Failure to delay [Risk Rating 2.0] would mean current NFIP policyholders will not have time to determine how new rates will affect their businesses and homes during a period of unprecedented social and economic hardship."

Until NFIP policyholders are charged premiums that reflect the risk to their properties, the program will continue to operate at a loss and require future bailouts. The $20 billion bailout included in House Democrats' bill won't be the last.

That $20 billion is, notably, about three times the size of the $6 billion House Democrats' bill devotes to new climate resiliency grants and loans. In dollar terms, they're spending far more subsidizing the housing most exposed to the risks of climate change than protecting existing homes from its future impacts.

"The Democratic leadership is not shy about discussing the impacts of climate change and the things we need to do to adapt to climate change," says Lehmann. "If you can't even get [flood insurance reform] done, it's hard to imagine how you're going to get the Green New Deal done."