Why The Government Sells Flood Insurance
SCOTT SIMON, HOST:
Hurricanes Harvey and Irma caused billions of dollars in destruction in Texas and Florida. The bill for repairing those properties will be enormous and much of it will be paid by taxpayers because many of those homes are insured by the federal government. Stephen Mihm of the University of Georgia published a history of the National Flood Insurance Program for Bloomberg View. And he joins us now from the studios of WUGA in Athens, Ga. Professor, thanks so much for being with us.
STEPHEN MIHM: Thanks for having me.
SIMON: Let me put it this way. If the National Flood Insurance Program were a private insurance company, would it still be in business?
MIHM: No. It would not. In fact, there was a private insurance industry for floods. After the Mississippi floods of 1927 vanished, they basically got out of it.
SIMON: How did the federal government get involved in flood insurance?
MIHM: Over the course of the post-war era, there was a growing recognition that people were in flood plains but couldn't get insurance to cover their homes. And so eventually, after Hurricane Betsy...
SIMON: What year is this, professor?
MIHM: This was '67, '68. So you saw a growing recognition that there were people in harm's way who didn't have insurance. And Congress created a program of government-backed flood insurance called the National Flood Insurance Program.
The idea was that the government would step in where private industry was unwilling to step. And they stepped in a lot of water in the process because they were going to insure people who were clearly at risk. And the problem that ultimately arose is that they charged them rates that didn't reflect that risk.
SIMON: So I don't have to tell you, people understandably have an emotional commitment to where they live. And they want to rebuild. And they want to move back there. Should the federal government help them do that when it might even be unsafe for them to be there in the years ahead?
MIHM: If you look at the demographic shifts of the country, the population, over the last 50 years, there has been a massive movement to the coastal counties - an increase in the population in those areas, approximately 40 percent or more. We may not want to tell them that they can't move back. But eventually, the weather may make that decision for them and for the federal government.
SIMON: Tampa, Miami and Houston - if I might put it this way, they're all major league cities. They don't want to take a step back.
MIHM: So one thing that could be done is to make flood insurance mandatory in these regions. What's interesting about Houston is that in fact many people didn't have flood insurance. That's what's making this so problematic - that even though they should have, they didn't.
And in '73 - 1973, Congress amended the original act and required that anyone getting a federally-backed mortgage buy flood insurance. But because - interestingly enough, securitization of mortgages has allowed a kind of lapse in that requirement.
SIMON: Because the debts have been sold so many times over at this point?
MIHM: Exactly, so another unintended consequence of securitization.
SIMON: What would you do, professor, if you were asked for advice? And I guess we are.
MIHM: Making insurance mandatory and putting real teeth in evasion of the mandatory requirement would be a great start because that would create what insurance is meant to create - a risk pool where everyone buys it.
SIMON: But let me interject. Wouldn't that make a lot of those homes unaffordable for the people who've been living there?
MIHM: Potentially. Or they would certainly - the value of the homes would be more accurately reflected in the sales price. It depends. If you believe in the wisdom of the free market and that markets should be transparent, then - as many, interestingly, Republicans do in these Gulf states - then it would make sense to have those prices be accurate reflections of the underlying risk of holding the properties.
SIMON: Stephen Mihm teaches history at the University of Georgia. Thanks so much for being with us, sir.
MIHM: Thanks so much. Transcript provided by NPR, Copyright NPR.