AN ESTIMATED 400,000 homeowners, sellers, buyers and mortgage refinancers around the country could be in for a financial shock at the stroke of midnight Dec. 31.
That's when the national flood insurance program ends - at least temporarily - thanks to Congress' failure to reauthorize it before leaving Capitol Hill for the holidays.
As of Jan. 1:
New-home sales transactions in the approximately 20,000 communities that are covered by the national flood hazard law will be subject to indefinite delays or even cancellation because of the lack of insurance policies.
The most directly affected include huge sections of the East and Gulf Coast states, extensive portions of the West Coast, plus thousands of inland areas adjacent to rivers, lakes and streams. Resort and second-home communities will be especially hard hit.
New mortgages and refinancings may be difficult or impossible to close in designated flood hazard areas. That's because under federal law, mortgage lenders and investors - including giants Fannie Mae and Freddie Mac - are prohibited from making or purchasing loans on properties located within flood hazard zones unless valid insurance policies are in force.
Realtors are likely to find purchase transactions and closings delayed, opening the door to higher numbers of contract "kickouts" or cancellations as the result of expiring rate locks and loan commitments.
Owners of condominiums and single-family homes whose flood insurance policies expire in January and February could find themselves with no coverage for a period of time - and vulnerable to heavy losses in the event of a flood disaster.
How could this happen? How could a program that protects 4.4 million property owners with $623 billion in total insurance coverage be allowed to lapse into legal limbo? And more practically, how can property owners and buyers in flood hazard areas deal with the situation?
Congress' failure to reauthorize the flood insurance program is directly connected to its partisan gridlock on virtually the entire federal budget this year.
To finance the government into 2003, Congress passed a "continuing resolution" authorizing operations at the major federal departments. But in an effort to keep the resolution streamlined, congressional leaders eliminated a variety of federal activities requiring reauthorizations before Dec. 31 to continue functioning.
One of those was the National Flood Insurance Program, which has been in existence since 1968. The program supplies an estimated 90 percent to 95 percent of all flood insurance written on properties in the United States and is combined with flood-plain management responsibilities for participating communities.
In some coastal and resort areas, flood insurance is required on virtually all structures to obtain financing.
With the Dec. 31 deadline approaching, Anthony S. Lowe, federal insurance and mitigation administrator, sent out guidance recently to advise program participants. As of Jan. 1, Lowe said, no new contracts for flood insurance will be available until Congress and the president reauthorize the program.
Requests for new coverage received - not simply postmarked - before that cutoff date will be accepted and the insurance issued.
In an interview last week, Lowe emphasized that the flood insurance program will be in "hiatus" mode for new insurance, but "we do have authorization to pay claims" on all existing policies in force. In other words, for most homeowners whose policies are not expiring in the near future, there should be no change in coverage or risk.
However, Lowe estimated that "about 400,000" new or expiring policies could be affected by the authorization lapse during January - and it is inevitable that some mortgage and real estate transactions will be disrupted.
Lowe noted that his agency and a broad coalition of real estate, homebuilding, insurance and financial trade groups are working to persuade Congress to restore the program as quickly as possible after it returns next month. Though prospects for reauthorization appear good, there is no assurance of a specific timetable.
One of the groups in the coalition, the National Association of Professional Insurance Agents, worries about the potential for financial disasters during the period when no new policies are being issued.
Pat Borowski, senior vice president for the association, asked: "What if we have a major flooding event Jan. 3? Who is going to help people who are knee-deep in water, with water seeping up the wallboards?"
What should homeowners and others in flood zones do to protect themselves? First and foremost, renew your policy early - well before Dec. 31 if possible - even if the coverage isn't set to expire until January or February.
Second, if you're planning to close a sale or purchase in the coming two months, do everything possible to get the flood insurance coverage nailed down before Dec. 31. Once that deadline has passed, it's anybody's guess when the program will be back in action.
Kenneth R. Harney is a syndicated columnist. His e-mail address is kharney@winstarmail.com. Send letters care of The Washington Post Writers Group, 1150 15th St. N.W., Washington 20071.