Government Shutdown Could Stall Home Purchases

The threat of a government shutdown has paused — at least until early 2024. But if Congress fails to extend the stopgap measure that postponed a shutdown, or agree on a new longer-term funding bill, thousands of would-be homebuyers may find themselves unable to close on their homes.

In many areas of the country, mortgage lenders require homebuyers to secure flood insurance before they can finalize the purchase of a property. Many homebuyers will turn to the National Flood Insurance Program (NFIP), the single largest flood insurer in the country.

But the NFIP would be one of many government agencies that would have to pause operations if a government shutdown occurs.

“A government shutdown could threaten 1,300 property transactions per day across the U.S. for consumers who are required to purchase flood insurance as a condition of closing on their new home,” says Mark Friedlander, director of corporate communications at the Insurance Information Institute (Triple-I).

Shutdown would threaten existing policies, too

“Claims on existing National Flood Insurance Program (NFIP) policies would still get paid if the federal flood insurance program isn’t reauthorized, but settlements could be delayed,” says Friedlander. “Additionally, [the] NFIP would be unable to issue new policies or renew existing policies and would face other funding constraints. Specifically, the shutdown would limit [the] NFIP’s borrowing authority from the Treasury Department from its current capacity of $30.4 billion to just $1 billion.”

If the NFIP were to stop issuing new policies amidst a government shutdown, consumers would have to turn to the private market for coverage. Private flood insurance can offer higher coverage levels, but also typically costs more than insurance through the NFIP. Those who couldn’t find private coverage might have to postpone — or even forgo — buying a home.

“The private flood insurance market offers dozens of options for homeowners seeking coverage,” Friedlander says. “Private insurers account for 32% of the U.S. flood insurance market, according to a recent report from the Insurance Information Institute. Private policies typically provide more robust coverage than an NFIP policy, including additional living expenses, and are not subject to the 30-day waiting period for a federally issued policy to take effect.”

What is the NFIP?

The NFIP is a network of more than 50 insurance companies partnering with NFIP Direct to provide flood insurance to businesses, property owners, and renters. The Federal Emergency Management Agency (FEMA) manages the program. In addition to providing insurance coverage, the NFIP works with communities to mitigate flood effects through floodplain management regulations.

The NFIP offers flood insurance to almost 23,000 communities in flood-risk areas across the United States.

The NFIP differs from private flood insurance providers in some key ways:

• Private plans can have higher policy limits and more comprehensive coverage.

• Protection of personal items, at full replacement value, can be available through private plans. The NFIP will pay toward damaged items but only consider their depreciated value.

• NFIP plans cap at $250,000 in coverage, while plans from private insurers can reach a higher dollar amount.

Latest status of the shutdown: Averted for now

The stopgap funding bill hasn’t completely averted a potential government shutdown. But the bill has at least postponed the threat.

The Senate voted Nov. 15 to pass a temporary government funding package. The 87-11 vote came one day after the bill passed the House on a strong bipartisan vote (336-95). 

President Biden signed the bill into law two days later.

This stopgap ends the threat of a government shutdown for now. However, it’s only a funding patch, and Republicans and Democrats will come together early next year in an attempt to solve their considerable differences and finalize a long-term budget solution.

Otherwise, the risk of a shutdown will return.

What’s next?

The temporary government funding package finances the NFIP through Feb. 2, 2024. However, should a shutdown occur, it could cancel NFIP funding after the deadline.

Friedlander advises that homebuyers with closing dates before the shutdown deadline review options through NIFP if necessary. If the closing date goes past February 2, researching options with private insurers may make more sense.