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.

Some 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.

And 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.

If 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.