Friday, November 2, 2012

Sandy, Part 1: Fannie and Freddie

Carolyn Maloney represents New York's 14th Congressional District. She is a senior member of the House Financial Services Committee and Ranking Member of its Subcommittee on Financial Institutions and Consumer Credit.  I'm guessing she wrote this before Sandy, discussing her demands for Fannie and Freddie reform.

Guess what she forgot: Fannie and Freddie are property insurance catastrophes waiting to happen, if we aren't already too late.  All those washed away houses with no flood insurance, and Fannie/Freddie guarantees?  You think homeowners pay mortgages on houses bouncing in the surf?   

Although flood insurance is "mandatory" enforcement is lax, except at inception of a mortgage.  Why don't people keep paying it?  Is it too expensive?  That might be conceivable if selling flood insurance made money, or were even a breakeven exercise.  We know that's not true, since the federal flood insurance program, if it were a private business, would be a poorly performing Ponzi scheme at best.
Flood waters rising in a neighborhood of houses
In fact, federal flood insurance is so stupid cheap relative to the risk that the government actually rations it!  As an individual, you can only buy $250,000 of coverage.  Still, people don't buy it.

Okay, maybe they cannot afford it.  Then they shouldn't live there.  There, I said it.  I cannot afford to live on Park Avenue, so I don't.  I cannot afford long walks on the shore every day from my front yard, so I don't live there either.    

What about those who can afford it and don't buy enough?  That's the whole point!!  Ask your insurance agent how much private market flood insurance costs when you live on the coast.  That's sticker shock.

Here's the simple facts: 

Imagine your house on the coast and contents costs $500,000 to replace in today's dollars.  Over the next fifty years, there's some chance you'll be robbed.  There's some chance you'll have a fire.  There's some chance your dog bites the neighbor's kid and the neighbor sues.  It is a near certainty that house and contents will be completely wiped out by a hurricane.  

Could be year one, could be year 50.  Let's say it's 25.  With interest rates at near zero, it's not too far off to say your insurance cost just for hurricane risk should cost $20,000 annually.  That's before inflation.  And, like I said, without "ordinary" losses.  And, without the insurance company making a profit.

Sure, Fannie and Freddie need to function "better" whatever that means, but, let's stop guaranteeing financial disaster.  Stop guaranteeing mortgages on guaranteed to wash away.  Bring transparency to the cost of owning beachfront property.