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If you own real estate or do business in a coastal, lakeside or riverside community, you could be caught in a year-end legal quagmire left over by the lame-duck Congress. Before heading home for the holidays, Congress failed to reauthorize the national flood insurance program into 2003. As a result, at the stroke of midnight December 31, no new or renewal flood insurance policies will be issued until Congress passes a new authorization and President Bush signs it into law.

That isn't likely to occur until sometime in January at the earliest, though no one can say how long the insurance lapse will last. In the meantime, an estimated 400,000 property owners, buyers and refinancers could be left without coverage, accoding to federal insurance officials. Also affected: thousands of people who expected to close transactions on houses and condos during the first half of January and possibly beyond. Realtors and home builders who scheduled closings with the expectation that mandatory flood insurance would be available could also be in for unpleasant surprises.

Federally-guaranteed flood insurance, which currently covers 4.4 million properties with aggregate insurance amounts totalling $623 billion, has been a mainstay of the U.S. real estate market since 1968. It is virtually essential for the sale or purchase for structures located in tens of thousands of designated flood hazard areas in approximately 20,000 communities around the country. Under the federal flood hazard statute, banks and other lenders may not extend mortgage financing to flood-prone properties that are not covered by flood insurance. Fannie Mae and Freddie Mac are not permitted to purchase loans from flood hazard zone properties without valid insurance policies.

Congress normally reauthorizes the flood insurance program, administered by the Federal Emergency Management Agency (FEMA), through the annual budgetary process. But this year, partisan politics turned the entire budget process into a legislative food fight. To avoid a shutdown of most federal agencies January 1, Congress passed a “continuing resolution” before leaving town at Thanksgiving. The resolution permits expenditures for most agencies and programs to continue at their current levels until they are reauthorized next year.

However, the resolution expressly left out authorizations for a variety of other expenditure items, including the flood insurance program. The rationale, according to one Capitol Hill source, was to keep the continuing resolution “lean, uncomplicated and noncontroversial.”

Now a broad coalition of concerned trade groups--the National Association of Realtors, the National Association of Home Builders, the Mortgage Bankers Association of America prominent among them--are lobbying Congress to reauthorize the program as quickly in the new year as possible. Congress isn't scheduled to return until January 7, and little action is expected before mid-month.

One positive sign: the Republican and Democratic leaders of the House Financial Services committee jointly announced plans late last week to introduce a flood insurance reauthorization bill early in the new session.

Meanwhile, what should property owners, buyers and sellers in flood hazard areas--and the Realtors who advise them--do to avoid problems during the insurance lapse period? Number one strategy, according to Anthony S. Lowe, the flood insurance program's national administrator, is to nail down coverage before the December 31 deadline. The same holds true for anyone whose flood insurance coverage isn't due to expire until January or February. Ditto for anyone who plans to refinance a mortgage with higher flood insurance coverage amounts than they currently have.

Since no one can say for certain how long the hiatus in operations will last, the safest bet for affected property owners and Realtors is to get the coverage--or renewal--early. Lowe emphasized in an interview that his agency will need to receive applications and premiums on or before December 31--and that simply postmarking envelopes by that the deadline won't be sufficient.

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