The Federal Emergency Management Agency ruled Thursday it will not approve new or renew existing flood insurance plans during the government shutdown.

Update: After publication, FEMA announced Friday it would resume selling new flood insurance policies during the shutdown and despite a lack of appropriations. 

The Federal Emergency Management Agency (FEMA) ruled Thursday it will not approve new or renew existing flood insurance plans during the government shutdown. The move could hold up thousands of home closings and eventually leave many homeowners in flood-prone areas vulnerable.

It’s also a change from previous policy, where FEMA allowed the program to continue during a shutdown.

“Unlike past government shutdowns, with this present closure flood insurance is not available,” National Association of Realtors Chief Economist Lawrence Yun said. “That means that roughly 40,000 homes per month may go unsold because purchasing a home requires flood insurance in those affected areas.”

“The longer the shutdown means fewer homes sold and slower economic growth,” Yun added.

A renewal of the nation’s National Flood Insurance Policy (NFIP) was originally tied to a continuing resolution that would have funded the federal government, but Congress ultimately passed an extension of the program last week. FEMA announced Wednesday that, despite a vote in favor of the extension, “due to the lapse in annual appropriations for the Department of Homeland Security, the annual appropriation for the NFIP also lapsed.”

“FEMA is aware of the concerns regarding this situation – especially given that Congress reauthorized the NFIP last week – and is actively working with external stakeholders to assess the impact and determine what options exist to enable the NFIP to allow the sale and renewal of flood insurance policies to continue,” the department said, in a statement.

“Recognizing that many Americans rely on the NFIP to protect their homes and businesses from damage caused by flooding, FEMA is currently reviewing all legal authorities with the Administration that would allow the NFIP to continue operations without interruption, so as to hopefully minimize impacts to policyholders and insurance industry partners during this funding lapse,” the statement continued.

The NFIP is a government program created to provide homeowners, business owners and renters with affordable flood insurance. It aims to lessen the cost of insurance by encouraging communities to adopt and enforce floodplain management regulations, according to FEMA.

There’s been talk of reform from both political parties – including a push from Republicans to allow private insurance options – but instead, NFIP has been extended a handful of times with no reform as it neared expiration.

As the law is currently written, homes in designated flood areas require insurance and the NFIP is the only option. So if a homebuyer was planning to close on one of the thousands of homes in one of those designated flood areas, there’s no private option and the closing will be held up until NFIP is renewed.

Policies that were in effect on or before December 21, will continue to remain in force and NFIP insurers will pay claims under those policies. A renewal to an expiring policy will not be granted during the lapse, but there is a 30-day grace period during which the policy is still effective.

NAR has estimated that 40,000 closings each month will be jeopardized due to NFIP not issuing new policies.

“Today’s ruling comes contrary to Congressional intent and is in conflict with FEMA’s decision to allow NFIP operations during the 16-day government shutdown in 2013,” Shannon McGahn, senior vice president of government affairs for NAR said in a statement. “NAR and its 1.3 million members are extremely disappointed by this abrupt and ill-conceived change of course.”

Randy Noel, chairman on the National Association of Home Builders (NAHB), also criticized the decision.

“FEMA’s short-signed action threatens to wreak havoc in many real estate markets from coast to coast at a time when the nation is already struggling through a housing affordability crisis,” Noel said. “By refusing to renew or sell flood insurance policies as a result of the federal shutdown, FEMA is not only thwarting congressional intent, but also hurting countless homeowners across the nation who reside in flood-prone areas and rely on the NFIP to protect their properties against the risk of flooding.”

Email Patrick Kearns

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