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Expired National Flood Insurance Program Forces Thousands to Delay Home Closings

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Shown here are homes in the Sweetwater Creek area of Atlanta, Ga., submerged in flood waters Sept. 23, 2009. (Reuters Photo)

The Senate's gridlock on extending unemployment benefits has caused an unintended side-effect -- thousands of people trying to buy new homes have held off on closing their deals because they have no flood insurance.

Before Congress left town for its Spring recess, Sen. Jim Bunning, R-Ky., put a last-minute hold on the bill to extend unemployment and COBRA benefits as well as prevent cuts in Medicare reimbursement fees to doctors. But included in the legislation was a short-term reauthorization of the national flood insurance program which is provided to 20,000 communities across the nation. 

As a result, thousands of home sale closings have been canceled or postponed in the past two weeks as cagey homebuyers feared buying homes without the insurance policy.

The lapse threatens the eligibility of people rushing to qualify for the $8,000 stimulus credit for first-time homebuyers, which ends April 30.

The impact on the already fragile housing market is too early to be understood but experts say it is unlikely to be positive. The National Association of Realtors, at the request of Fox News, estimated that each day the program is dormant, 1,400 closings are adversely hit.

The move has thrown the beleaguered real estate industry into crisis mode, said Lucien Savant, spokesman for the National Association of Realtors.

"When Congress returns we will be waiting on the steps for them," he said.

Fannie Mae, Freddie Mac and the Federal Emergency Management Agency have all issued statements saying that closings should go through and that flood insurance approval would be granted after the program is re-authorized. But that has not assuaged many buyer's attorneys, who are reluctant to assume responsibility, in case the program is altered, and have counseled buyers to wait.

The federal assurances haven't done much for the one place where the flood is synonymous with the city: New Orleans.

Joe Ory, President of the New Orleans Metropolitan Association of Realtors called the delay "an absolute catastrophe."

He said that last week he had a client who had bought a second floor condo in a part of New Orleans that had no history of flooding. She flew in for the closing from Houston and when they sat down the lender refused to issue the mortgage because the condo didn't have flood insurance and couldn't get it.

"We thought we could work around it. She offered to escrow the money but the lender wouldn't accept. She ended up driving back to Houston," he said. "She will have to wait until it is reauthorized. Now the buyer will continue to pay fees on the property. She will not be able to move, buy furniture or get out of her place in Houston. And all the other businesses that make money from a sale will not have a chance to participate. It is just catastrophic," he said. 

He estimated that his client would end up potentially spending thousands more because of the delay.

"And I can tell you this," he added, "10 percent of those homes delayed because of this will not sell because of other contingencies like loss of mortgage commitment or the lapse of the appraisal."

The insurance program officially expired on March 28 and Congress is reconvening Monday, when a vote is expected.. On March 17, the House passed passed an extension of federal coverage through April 30 but it stalled in the Senate over objections on how the bill would be funded and several other programs it encompassed, including jobless benefits. 

Even if Congress reauthorizes the program, real estate experts say it will only extend the program to the end of April. 

"And then we will go through this all over again," one expert said.

The National Association of Professional Insurance Agents also expressed its disappointment with the inactivity on Capitol Hill.

"Congress needs to stop playing games with this," NAPIA president-elect Brian Marino said in a statement posted on the group's Web site. Marino added that at the end of one of the most severe winters in the nation's history, "the snow is melting, the rivers are rising and Congress is leaving its constituents unprotected."