flooded neighborhoodMy neighbor thought he had finally sold his house after three unsuccessful tries. But just when the buyer was about to sign off, mortgage financing agency Fannie Mae tacked on one last charge to the bottom line: flood insurance. It killed the deal.

My neighbor was angry. His home sits on high ground and has never been flooded. A creek several hundred yards away overflowed 40 years ago, but a cement culvert corrected the problem and our homes have stayed dry ever since.

High and dry

Why was the buyer forced to purchase flood insurance through the costly National Flood Insurance Program (NFIP)?

A lot of people are now asking that question. From high-rise residents in New York City to desert-dwellers in Los Angeles, some potential buyers are being hit with a flood insurance requirement. And, they don't have a choice.

But even if your mortgage lender doesn't require flood insurance, the Federal Emergency Management Administration (FEMA), which failed so miserably during Hurricane Katrina and runs the NFIP, still gets into your business. At my home near the New Jersey shore, the township denied me the right to update and build with my own money unless my house was raised up on stilts, even though it had never flooded. A FEMA-mandated flood zone survey found that I was six inches below their height requirement.

Drowning in debt

Why is FEMA so concerned with having homeowners purchase flood insurance? The main reason: the NFIP still owes the federal treasury $18 billion from Hurricane Katrina flooding damage Louisiana in 2005. And now, seven years later, Hurricane Isaac came ashore in almost exactly the same place. No one can predict how much this will cost the NFIP, but a rough estimate -- based on private insurance costs -- is about $2 billion. A University of Mississippi economics professor called the NFIP "a complete mess."

In order to pay off this massive debt, FEMA has now "redrawn" its flood plain maps. Supporters would argue that, thanks to this realignment, a lot of people no longer have to pay for this costly insurance. If this is true, I haven't heard from them. Instead, I have heard from a lot of homeowners who got roped into the NFIP and aren't happy. "My flood insurance has risen to $1,780 a year," one Chattanooga resident told me. "And my 1948 home has never flooded."

It makes me wonder if flood insurance is the next car insurance: You can't drive a car without it.

Millionaires' insurance

It wouldn't be so bad if the NFIP was well run. It's not. The program should be called "Gulf Coast Builders Insurance." Most of the money we pay in goes straight to claims on the Gulf Coast -- with Florida and Texas taking the lion's share.

Reconstruction after storms helps the building industry, not to mention the millionaires who keep building and rebuilding on the coast -- with our money.

Three's company

And let's not forget that private insurers benefit, too. Of the $3.4 billion that our premiums bring in annually for the NFIP, one-third typically goes to private insurers such as Allstate and State Farm, which manage the program locally, collect the premiums and appraise the claims when there's a flood. In this public-private partnership, the private sector keeps the money and takes none of the risk, while we assume the debt. An Alabama newspaper called it "a sweetheart deal."

So what's the alternative? The NFIP has been renewed 17 times, including four times when it had actually expired, throwing the real estate market into a panic because mortgages with flood insurance couldn't be written.

Biggert-Waters

Finally this year there has been some reform in the system. The Biggert-Waters Act makes the NFIP more efficient and points it in the right direction. But now Hurricane Isaac will once again blow it off course.

Those who want flood insurance should be able to purchase it from the private market -- or they shouldn't be allowed to build where it will flood. Both Britain and France, neither of which have a thirst for Tea Party-style capitalism, offer private insurance coverage.

But our private insurers have walked away from this market, except when it benefits them. So here we sit stuck with FEMA and the NFIP. Waiting for another Isaac instead of Godot.