Ron Paul: NFIP Creates Moral Hazard In Housing

Posted by Orb Staff on November 06, 2012 No Comments
Categories : Mortgage Servicing

12693_ron_paul Ron Paul: NFIP Creates Moral Hazard In Housing Rep. Ron Paul, R-Texas, citing the costs of federal relief efforts relating to Hurricane Sandy, is questioning whether the National Flood Insurance Program (NFIP) is responsible for creating a moral hazard in housing.

In a statement posted on his website, Paul, chairman of the House Subcommittee on Domestic Monetary Policy and Technology and a candidate for the Republican presidential nomination, writes that the federal response to Hurricane Sandy ‘raises uncomfortable questions about the extent to which taxpayers should fund the cleanup and the extent to which government programs create moral hazards.’ He cites the $18 billion in federal debt created by the relief efforts for Hurricanes Katrina and Rita and warns that the U.S. government should not be involved in providing flood insurance to homeowners.

‘After all, the market would never provide insurance in flood-prone areas at an affordable price,’ Paul writes. ‘But shouldn't that tell us something? Shouldn't that tell us that it is a losing proposition to insure homes in coastal areas and flood plains often threatened by severe and destructive weather patterns? And if it's a losing proposition, should taxpayers subsidize the inevitable losses arising from federal flood insurance?

‘The NFIP disguises the real cost of flood insurance in flood prone areas, which influences homebuilding and sales in such areas,’ Paul continues. ‘Recklessly taking unwise risks when risk is underpriced is known as moral hazard. When politicians decide that private insurance premiums are too high, as with houses built in flood plains, the solution is to underprice the risk through federal subsidies. The obvious and expected outcome is more danger to life and limb when disaster strikes.’

Paul adds that NFIP has been ‘forced to raise rates significantly in coastal areas, and is now dropping second homes from coverage altogether.’ Paul also criticizes the Federal Emergency Management Association (FEMA), saying that it ‘mismanaged recovery and relief’ in earlier hurricanes and was ineffective in comparison to non-government entities.

‘Organizations such as the Red Cross and private companies like Home Depot and Duracell have already stepped in admirably to help those in need, and we can only hope FEMA has learned this time not to impede and frustrate private efforts as they have in the past,’ Paul writes.

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