Flood Elevation Plan Sparks Concerns about Housing Affordability

Mortgage

Image: Bloomberg News

The Department of Housing and Urban Development’s proposed guidance has stirred up a debate on elevation standards as flooding occurs more frequently and in more unexpected places.

In its current form, the HUD proposal would impact Federal Housing Administration-insured construction projects in floodplains as well as substantial improvements to existing single-family homes and multifamily buildings. Privately financed projects would not be affected.

But that could still add up to a big impact, industry representatives said.

The higher elevation requirements could impact affordability and “may limit the number of newly constructed homes available to many first-time and low-to-moderate income borrowers,” wrote Thomas Kim and Steve O’Connor of the Mortgage Bankers Association in a Dec. 21 comment letter.

Ed Brady, the chairman of the National Association of Home Builders, also warned that the new elevation requirements and flood proofing requirements for multifamily construction would “make many projects infeasible, due to increased construction costs and the inability to offset these cost through higher rents.”

HUD issued the proposal in response to an executive order by President Obama directing the department to expand its flood risk management policies.

“Our nation is faced with mounting and compelling evidence that future flooding events will be increasingly costly and frequent,” said HUD Secretary Julian Castro in an Oct. 27 press release. “If we’re serious about protecting people and property from flooding, we have to think differently than we did 40 years ago. Today we begin the process of aligning our regulations with the evidence to make sure taxpayer dollars are invested in the most responsible and resilient manner possible.”

To be sure, the plan could be scrapped or reworked by the incoming Trump administration. But if finalized as proposed, the lowest floor in newly built FHA-insured single-family home would have to be at least two feet above the site’s base flood elevation commonly known as the 100-year floodplain.

But Brady said that in addition to that two-foot elevation requirement, multifamily developers would have to adhere to a 100-year floodplain that extends out horizontally.

In low lying areas, the use of the two-foot standard extends horizontally across the floodplain until it is even with the ground.

“It captures the fringe areas outside the 100-year floodplain,” said Joel Scata, a project attorney at the Natural Resource Defense Council, in an interview. “A lot of damage occurs outside the 100-year floodplain.”

About 20% of National Flood Insurance Program claims come from people living outside the 100-year floodplain. They “receive one-third of disaster assistance for flooding,” Scata said.

In its comment letter, the Natural Resource Defense Council points out that Indiana, Montana, New York and Wisconsin have a two-foot elevation requirement for development by both private and public construction occurring in the 100-year floodplain.

“What is interesting is that 60% of the U.S. population lives in localities that require an additional elevation above the 100-year flood level,” Scata said. “It is not novel. It is really the federal government catching up to what has become common practice.”

Despite the added cost of meeting the new elevation standards, homeowners would benefit from lower flood insurance costs. “If the home is below the 100-year flood level, you are going to pay a lot of money for flood insurance,” Scata said.

The Federal Emergency Management Agency refers to the elevation requirements above the 100-year flood level as “freeboard.” So the first floor of a structure built to freeboard standards must be sited at least one foot or more above the base flood elevation.

The National Association of Realtors contends FHA’s two-foot elevation standard would “conflict with 46 state freeboard decisions.”

The HUD proposal would “create a particular hardship for homeowners who recently retrofitted to a lower standard” particularly in areas of New Jersey impacted by Hurricane Sandy, wrote William Brown, the president of NAR in its Dec. 7 comment letter. “Alternatively, a one-foot standard would reduce the state conflicts and burden while providing a margin of safety in 30 states that default to a federal standard.”

HUD’s proposal also would extend to substantial improvements to properties in flood zones. The Realtors want HUD to clarify how FHA would approve 203(K) home improvement loans in special flood hazard areas or SFHAs.

“To our knowledge, this is the first time FHA’s new-construction standard would extend to substantial improvements in SFHAs,” Brown wrote. “Without clarification on the proposed substantial-improvement component and a more complete cost-benefit analysis, it is difficult to evaluate the two-foot proposal or how it would impact FHA loan products.”

The MBA has called on HUD to take a further look at the impact the proposal would have on first-time and low- to moderate-income borrowers living in floodplain areas.

The MBA and other trade groups also want HUD to provide clarity about the effective date of the floodplain management rule. They are also seeking to grandfather projects where the builder or developer has already submitted applications for funding or mortgage insurance.

“Multifamily rental housing development is a long, complex process with many moving pieces,” wrote Chris Estes, the president and CEO of the National Housing Council.

“Changing requirements midstream could prevent a development from moving forward if, for instance, financing sources cannot accommodate changes in cost. We therefore recommend that HUD include a 12-month grandfathering period for properties whose applications for funding or mortgage insurance applications are already in process when the rule goes into effect. This would provide for an orderly transition to the new requirements included in the proposed rule.”

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