Federal shutdown could hurt homebuyers who need flood insurance

Long Islanders who are required to buy flood insurance to close on a house purchase could be caught up in Congress’ failure to fund the government by Saturday’s deadline. More homeowners could be affected if the shutdown drags on.

Funding for the National Flood Insurance Program, which insures about 5 million policyholders, expires Saturday, and the NFIP would not be able to issue new insurance policies or renew existing ones until Congress extends its authorization.

Buyers who purchase a home in a FEMA-designated special flood hazard area are required to insure against flood damage, which is not covered under standard homeowners insurance.

However, David Clausen, CEO of Coastal Insurance Solutions in Rocky Point, said the emergence of more options from private companies for flood insurance makes him less concerned that Long Island’s real estate market will be affected by the shutdown.

The NFIP changed its method for setting flood insurance premiums in 2021 through an initiative called Risk Rating 2.0, which provided an opening for private insurers to compete on price, according to global credit rating agency A.M. Best. The number of private insurers offering flood policies quadrupled from 47 in 2016 to 198 in 2022, the report said.

“If there were no private flood insurance options, I would be concerned because then you would shut down the real estate market in coastal areas,” said Clausen, who also noted that only buyers financing their purchase with a mortgage would be affected.

Still, one major difference is private insurers can refuse to take on certain properties, while owners of homes in high-risk areas or ones that frequently flood can still buy federal coverage.

“There’s going to be certain properties that these private insurers are not going to want to insure,” Clausen said.

There were about 73,000 federal flood insurance policyholders on Long Island as of Aug. 31, according to FEMA data.

Existing homeowners with federal coverage would only be affected if the shutdown persists. Policies remain in effect until their renewal date and then there is a 30-day grace period.

The real estate industry fears the shutdown could hurt business. A coalition of real estate advocacy groups wrote to House Speaker Kevin McCarthy and other congressional leaders earlier in September to urge them to fund the NFIP, noting the problems the industry would face if its authorization lapsed. The groups included the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association.

The NAR estimated the shutdown would threaten 1,300 U.S. property sales daily.

 It's possible some homebuyers could take over existing policies from sellers during a shutdown, according to the NAR, which noted that the federal requirement to purchase flood insurance is suspended during the shutdown. It will be up to lenders whether to require borrowers to get flood coverage to secure a mortgage. 

Will Friday’s flooding in parts of the region complicate matters? Clausen said it could be harder to turn to a private insurer if someone is buying from a homeowner who submitted a flood claim that isn’t resolved before closing.

“If a home had an open claim and [a buyer] approached insurers in the private flood market to purchase flood insurance for a closing, you would be limited on the number of insurers willing to offer a rate — and the buyer wouldn’t be thrilled on the walk-through either,” he said.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.