Another housing crisis brewing

As it continues to pick up the pieces from the mortgage mess,
Congress needs to take note of another housing-related crisis that
threatens America’s fiscal future. Already, irresponsible federal and
state homeowners’ insurance schemes could easily cost the nation
several hundred billion dollars when and if a major hurricane hits.
Virginia would pay a significant share of the tab. If it wants to
secure America’s future, in short, Congress needs to take a look at
homeowners’ insurance.

Quite simply, states along the Gulf
and Atlantic Coasts have taken on massive—probably unpayable—property
insurance burdens in order to keep homeowners’ insurance rates down.
Florida alone has a potential taxpayer liability of at least $36
billion in bonds. (No state has ever issued more than $11 billion in
bonds all at one time.) Texas, Louisiana, Massachusetts, North
Carolina, Mississippi also have large and growing obligations to insure
their citizens’ homes. (Virginia has, so far, resisted doing anything
like this.) These enormous liabilities could result in a massive stream
of private and public bankruptcies following a single, bad storm season.

in Congress want to make things worse. Federal wind insurance and
“homeowners’ defense” bills that have passed the House of
Representatives but were rejected in the Senate would have transferred
enormous amounts of hurricane liability from the states to the federal
government. A recent study by former President Clinton appointee Robert
Shapiro and American Enterprise Institute research fellow Aparna Mathur
estimates that these proposals could cost as much as $230 billion a
year. States away from the Gulf and Atlantic Coasts would pick up most
of the tab but sensibly run Atlantic Coast states would get hammered
too. Here in Virginia, for example, the bills for taxpayers from these
programs could top $4 billion—just about $1,400 per household. Even
without these proposals, the federal government could easily end up
with multi-billion dollar bills from a single major storm.

the costs will go sky-high specifically because of misguided state
government programs. North Carolina is about the same size as Virginia
and faces roughly the same danger from hurricanes. But it would reap
several billion in benefits at the expense of Virginians. Although
Virginia has a small government-mandated, privately run program
intended to help people who really can’t find insurance at any price,
it currently covers less than 1 percent of homeowners and has shrunk
for the last two years. North Carolina, on the other hand, covers about
4 percent of its homeowners and has seen its subsidy program more than
double in size over the past five years.

Quite simply,
avoiding another economic crisis means doing away with these subsidy
programs rather than making things worse by transferring them to the
federal government. Still, the federal government does have a role to
play. While well-off people should pay their own costs if they chose to
live in a hurricane-prone area, it would be unfair to many people on
fixed incomes if the government suddenly ended every government-run
insurance program.

Instead state and federal governments
need to work together to encourage people to help themselves and
reinforce their homes against storms. Some people might receive
incentives to move out of harm’s way while more should receive tax
credits, rebates or grants to retrofit their homes and protect them
against hurricanes.

In the Tidewater area, most people
living within a few miles of the coast—most of the population of
Hampton Roads and many Virginia Beach residents—would qualify for these
credits. In all likelihood, furthermore, the subsidies would more than
pay for themselves by reducing recovery costs each time a hurricane hit.

it wants to avoid another economic crisis, Congress needs to pay
careful attention to the nation’s homeowners’ insurance environment.
And, instead of subsidizing bad building choices, it should help
Americans help themselves.