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A Beverly Hills Bailout?

Federal earthquake insurance is an awful idea.

Jul 25, 2011, Vol. 16, No. 42 • By ELI LEHRER
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It’s much more likely, however, that a federal program would underprice its coverage and leave all taxpayers holding the bag. The results could resemble those of the most similar existing federal effort, the National Flood Insurance Program, which promised to break even in the long run when it started over 40 years ago but currently owes the Treasury over $17 billion and has no practical way to ever pay it back. Because of California’s ongoing financial crisis, it’s quite plausible that in the event disaster struck, it would be able to slough its obligations off on federal taxpayers. Even if California met the bill itself, the need to fund repairs from tax revenues could send people fleeing the state. And none of this takes into account the need for another bailout of Fannie, Freddie, and the many banks that would suddenly be in trouble if enormous numbers of California borrowers walked away from mortgages following a quake.

Earthquake coverage today is not remotely unaffordable. In early July 2011, CEA quoted a premium of $71.67 a month for a 20-year-old, two-story wood-frame Beverly Hills (90210) house with a structure value of $500,000 (land value would almost certainly put the sale price of such a house over $1 million). CEA’s deductibles, 15 percent in the above example, are much higher than those typical from wholly private insurers but not unmanageable since low-interest, everyone-qualifies Small Business Administration disaster loans could cover uninsured costs.

The solution, therefore, isn’t a new federal liability but measures that would encourage homeowners to take responsibility, rather than assume an eventual taxpayer bailout. If Congress wants to do something constructive, it should protect taxpayers around the country by having Fannie and Freddie require privately backed earthquake insurance for all mortgages in seismically active areas, just as they now require homeowners’ insurance everywhere else. It’s true that any measure that raises housing costs will cause further turmoil in California’s housing market. But the benefits of having private insurance available to pay the costs of “the Big One” far exceed the damage to housing values that might result.

Whatever happens, however, members of Congress, even those from California, should realize that proposals to have the federal government take over the earthquake insurance market will not work as advertised.

Eli Lehrer is vice president of the Heartland Institute.

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