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Time to End The Beach House Bail-Out

Did you know that some $19 billion of your tax dollars are going to bail-out rich coastal homeowners and insurance companies through the National Flood Insurance program?

Probably not. Like so many other government subsidies, the bail-out is hidden in a labyrinth of rules and regulations that obscure what your taxes are paying for and who is getting your money. In this case, the beach house bail-out is written into the soon-to-be renewed federal flood insurance program. Worse, the size of this bail-out could double overnight if one renewal proposal that would add wind-damage coverage to the program is passed.

A national consumer group is calling for this bail-out to stop, but it will be tough sledding. To understand why, you have to dive into the details of the 42-year-old flood insurance program and why it's gone so far awry.

The National Flood Insurance Program was launched in 1968 to discourage building in areas that were at high risk for flooding. The program guaranteed that homeowners could buy flood insurance through the federal government, as long as their communities participated in flood mitigation efforts that would reduce future flood risks and ensure that homes built in flood plains would be constructed in ways that would reduce the chance of loss. The insurance was supposed to be sold at cost, ensuring that there was no taxpayer subsidy.

But this good idea has since been ravaged by a combination of politics and ineptitude, said Robert Hunter, director of insurance for the Consumer Federation of America. Now taxpayers are subsidizing a program that actually encourages building multi-million-dollar homes in the Gulf Coast and other areas where erosion and outdated flood maps ensure that taxpayers will lose money on virtually every policy written.

The problem starts with flood maps, which are supposed to be updated every five years -- by law. That would ensure that the rates charged for flood insurance would keep pace with the risk, which changes as communities develop, paving over ground that would otherwise absorb rain and leveling areas that previously provided natural drainage. But the Federal Emergency Management Agency, which is charged with the job of doing these updates, is disastrously behind.

A General Accountability Office study found that more than half of all flood maps had not been updated in more than 15 years. That creates "hidden subsidies" in areas where flood risk has risen dramatically, says Hunter.

Hunter, a former Texas Insurance Commissioner, said he studied the outdated Mississippi flood maps prior to Hurricane Katrina and found that they consistently under-estimated how high flood levels could rise by roughly 10 feet. That would cause people to believe they were building safely, when they were at risk. Had flood maps been updated prior to Hurricane Katrina, people at risk would have been warned and paying higher premiums -- potentially saving both the government and private citizens from devastating losses, he said.

When FEMA does update maps, it often caves in to political pressure to modify its findings, says Hunter. Why? An updated map could hike insurance premiums on an entire community, which sends "not-in-my-backyard" politicians into hyper-drive. Decades ago, when Hunter administered the flood program, politicians in an area that faced higher flood premiums threatened him for raising risk assessments. That political pressure continues, he says. Unfortunately, regulators cave in too often, which means that legislators from high-risk areas are secretly forcing taxpayers in low-risk areas to subsidize their constituents.

Another segment of the program called "Write Your Own" provides subsidies to insurance companies by allowing these companies to overcharge for services and toss wind losses -- which should be covered by private insurers rather than the government -- back to Uncle Sam, Hunter said. One Congressman's effort to restrict this boondoggle in the reauthorizing legislation that's now being debated in the House is being actively opposed by insurance groups.

Why do you need to know about this now? The National Flood Insurance Program is on top of the legislative to-do list because the program's authorization expires in September 2010. Congress (backed by insurers) want to extend the existing program for another five years. Consumer Federation of America, a group that's comprised of more than 100 consumer advocacy groups, opposes the long-term extension. Instead the group suggests that legislators pass a short-term fix and solve the long-term problems before committing taxpayers to years of continued bailouts of developers, homeowners and insurance companies that already are estimated to cost some $1.2 billion annually.

If you want to end the beach-house bail out, write your legislators now. Here's a link that can help you easily contact all of your federal elected representatives.

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