WASHINGTON, DC – The news coming out of Texas, Houston inparticular, has been heartbreaking.

Indeed, the Federal EmergencyManagement Agency Administrator Brock Long toldCNN that “FEMA is going to be there for years.” Thestate of Louisiana and other parts of the Gulf Coast are now facingsome peril from the remnants of Hurricane Harvey as well.

All in all, Hurricane Harvey is a storm that has rivaledHurricane Katrina in misery and destruction.

Related: Dismantling the NFIP monopoly

In a larger sense it has also served to highlight — just asKatrina did — the weaknesses of the National Flood Insurance Program. It just so happenedthat Harvey roared ashore with the NFIP set to expire at the end ofSeptember unless reauthorized by Congress. The program is also indebt by some $25 billion in large part because of Hurricane Katrinaas well as Superstorm Sandy. How much further into the redHurricane Harvey will push the program remains to be seen.

How we got in this mess

To be fair, the NFIP was a mess long before Hurricane Katrina madeher unwelcome debut. The program was poorly organized for the first40 or so years of its existence, says Brad Hubbard, a civilengineer and owner of National Flood Experts, where he worksevaluating properties in Florida to determine whether they havebeen correctly zoned by FEMA. He’s also the authorof Flood Money: The Guide to Moving Your Property from theFlood Line.

In the early days NFIP did not allow for reinsurance or asurplus account, Hubbard tells GlobeSt.com — meaning that if theNFIP made money in a given year, it didn’t save it for the nextyear should an event were to happen.

“Since floods are generally large and catastrophic, this madevery little sense; and when the large events of the last 20 yearshit, there was no surplus account to help fund the claims,” hesaid.

“The NFIP also pays around $300 million per year in interest onloans from the Treasury. These are all things that have debilitatedthe NFIP in the past and make it difficult for future success.”

Fortunately in the past few years, the NFIP has made greatstrides in purchasing reinsurance, which reduces its risk in largeevents such as Hurricane Harvey, Hubbard says.

Could it be discontinued?

Still, though, the NFIP has had a few near death experiences inCongress and with a September renewal deadline looming — togetherwith Congress’ packed schedule for this Fall — it is fairto worry what the market would look like without it.

It wouldn’t be pretty, at least not in the short term,says Valrie Chambers, an associate professor of accountingat Stetson University in Florida.

Related: Draft legislation to overhaul National FloodInsurance Program released

Consider that one of tenants in the call for tax reform is theelimination of all itemized deductions except mortgage insuranceand charitable contributions. That would mean, she toldGlobeSt.com, that casualty losses would no longer bedeductible.

“If the NFIP ends, I would expect regional real estate marketsto be skewed and more bankruptcies to occur,” she said.

That is one scenario but coming on the heels of Hurricane Harveyit is hard to imagine Congress taking such a politicallyunpalatable step. Indeed, even the normally cash-strapped FEMA islikely to get what it needs for this crisis, says Daniel Hahn,a faculty member at the Miami-based Barry University aswell as a full time emergency manager in Florida.

“Due to politics FEMA will probably get the money they need forthis disaster, so will Louisiana,” he tells GlobeSt.com. “Anyonevoting against the renewal of the NFIP next month after seeing whatis happening in Texas is committing political suicide, andpoliticians do not do that often or in great numbers.”

Homes are surrounded by floodwaters from Tropical StormHarvey Tuesday, Aug. 29, 2017, in Spring, Texas. (APPhoto/David J. Phillip)

What would NFIP reform look like?

Another option would be a comprehensive review and reform of the program— something that many Congresspeople have been calling for. Thereis arguably a need for this.

Beyond Hurricane Harvey, there are longer-term pressures thatcould cause the program to unwind or at least further weaken.

Dennis Toft, an environmental attorney at NewJersey-based Chiesa Shahinian and Ginatomasi likens thesituation to health insurance: As more people participate — due toFEMA’s new mapping — and the risks increase, the program is morelikely to become insolvent absent change.

Limit risks through government action

In any reform of the program, the first question that should bedecided is whether there are ways to limit the risks throughfurther governmental action, he tells GlobeSt.com. “This couldinclude further buyouts of flood-prone homes, stepped-upenforcement of building code requirements, educating the publicabout changes building owners can make to reduce premiums — such asraising the elevation of occupied floors — and other similarmeasures.

“In addition to taking risk reduction measures, a decisionshould be made about the extent of government subsidies for theprogram and whether the federal government is willing to supportthe NFIP to keep premiums lower,” he said.

“Even if an effort is made to shift the program to the privatesector, care must be taken so that flood insurance premiums do notbecome cost prohibitive for many existing property owners.”

Indeed, previous attempts to reform NFIP have not meet withraging success.

Related: NFIP challenges & reform options from theAmerican Academy of Actuaries

A substantial increase in homeowner premiums was later reducedin the face of financially overburdened constituents, MichelleRudd, a partner at Stoel Rives who focuses on land useissues notes.

“Something must, however, be done,” she told GlobeSt.com.

Focus on emergency preparedness?

Rudd, too, has her ideas about possible program modifications andsuggests they should focus on emergency preparedness.

“One option is improving the collection and distribution ofinformation,” she said. “In terms of the collection of information,the NFIP reform should facilitate better information by providingfinancial assistance and authority for local governments to use newtechnology to improve the mapping of flood hazard areas. And,regardless of the potential pushback from the currentadministration, the updated mapping needs to recognize and accountfor the anticipated impacts of climate change and the relatedincrease in extreme weather events expected.”

Ultimately, though, Rudd said, a revamped NFIP may wind upmaking its largest investment in simply moving people out of thefloodplain.

“By providing funds to assist local governments in buyingproperty in the floodplain, human life can be protected and theland used for water storage during flood events and open space orother creative uses the rest of the time,” she said.

Stating the obvious, this would not be a simple solution, shesaid. The value of these properties is reduced by their locationwithin the floodplain, for starters and a payment of fair marketvalue may not provide these property owners with enough money tolocate outside of the floodplain.

Debt forgiveness for NFIP

Another possible solution for the NFIP would be debt forgiveness orsome variation thereof, and then introducing an element ofprivate-sector competition. Some Congresspeople would like to seeflood policies written by private insurers, so at least they aremore reflective of the true risks. The NFIP would become viable forthe long term as well.

Related: Offering private flood insurance in California:Golden Bear's experience

“If the federal government forgave the debt currently owed andallowed the NFIP to operate more like a private insurance company,it would then have the opportunity to succeed in what it wasdesigned to do,” Hubbard of National Flood Experts says. After all,“In the past four calendar years since Hurricane Sandy, the NFIPhas collected over $8.2 billion more in premiums than in claims itpaid out. This money, plus reinsurance, would most likely be enoughto cover the expected losses in Texas.”

In short it looks as though NFIP has found its secret tosuccess: purchasing reinsurance and creating a surplus account. Itwould also help if its flood insurance agents sold more insurancein non-high risk areas, Hubbard added.

“Forgiving the current debt and allowing them to start over witha clean slate and better practices would help immensely in theprocess,” he said.

Erika Morphy ([email protected]) has been writingabout commercial real estate at GlobeSt.com for more than 10 years,covering the capital markets, the Mid-Atlantic region and nationaltopics.