What a Government Shutdown Would Mean for the National Flood Insurance Program

With a government shutdown seemingly avoided, buyers, sellers and real estate professionals alike should be aware of how exactly a shutdown could affect the industry, with another bill needed to fund the government again in September. 

For people applying for home loans in regions considered Special Flood Hazard Areas (SFHA), flood insurance is usually required before a loan can be finalized. But since many private insurance companies don’t carry flood insurance, the National Flood Insurance Program (NFIP) acts as the primary coverage provider for most residential homes.

Managed by the Federal Emergency Management Agency (FEMA) and established by Congress in 1968, the NFIP not only protects homeowners from floods, but it also helps buyers in SFHA secure loans. Without the NFIP—given its funding from the government—the housing market in flood-prone areas would be severely impacted.

The NFIP is essential to approximately 1,360 daily home sale closings, or 41,300 monthly transactions nationwide, according to the National Association of REALTORS® (NAR). Without the NFIP, NAR estimates that total income losses could reach $69.7 billion annually, based on the income generated by each home sale in each state.

During a government shutdown, existing NFIP policies remain in effect until their expiration date, but depending on how long the lapse continues, FEMA could run out of money to cover losses.

In previous shutdowns, Fannie Mae and Freddie Mac continued normal operations but still required proof of a completed flood insurance application and proof of payment for the first premium or the assignment of an existing policy from previous owners.

Florida’s housing market would take the biggest hit from an NFIP lapse, per NAR’s analysis. It would impact about 14,870 home sale closings per month, either delaying or canceling them entirely. In Texas and California, the market would bring 3,590 and 1,680 home sale closings into a gray area, respectively.

In a recent report from First Street, it’s projected that, due to climate change, flood-related damages could increase dramatically in the next few decades, drastically altering the housing markets in flood-prone areas like Louisiana and Florida.

Given that the housing market also provides jobs for the construction, manufacturing and retail industries, the broader economy can be impacted as well.