Residents wade through high water on Catalina Street in Monticello subdivision as flood waters rise in August 2016. A new study shows private insurers could help reduce the cost of flood insurance.

The Federal Emergency Management Agency says it will not issue new flood insurance policies or renew existing ones that lapse, upsetting members of Congress who believed they took steps last week to ensure continuation of the National Flood Insurance Program despite a partial government shutdown.

Claims made under NFIP policies in effect before midnight Dec. 21, when the federal shutdown began, will be honored for as long as funds are available, according to a statement on FEMA’s website.

For homeowners, valid policies will also remain in effect regardless of the government’s ability to pay claims, and FEMA said Thursday expiring policies will become void after a 30-day grace period. Those wanting to buy or sell a home in a flood-prone area will likely see delays; a New Orleans-area Realtor said at least two dozen transactions had already fallen through.

FEMA said it decided to halt flood insurance funding because commission payments to private insurance companies the government contracts with to issue policies could be seen as an “impermissible funding obligation” during the shutdown.

The agency falls under the U.S. Department of Homeland Security, whose annual funding appropriation wasn’t authorized before the shutdown. Under the federal Antideficiency Act, federal employees are barred from spending more money than is available.

News of FEMA’s decision broke as severe storms rolled across Louisiana Wednesday and Thursday, creating small-scale flood risks that still could yield devastating results. Gov. John Bel Edwards said in a statement Thursday that the impact of the federal shutdown was hitting home.

“Today, Louisiana is being inundated by torrential downpours which makes FEMA's decision to disallow the renewal or issuing of new policies through the National Flood Insurance Program a real concern to thousands of families in our state,” Edwards said.

Over 501,000 Louisiana homeowners currently depend on the NFIP for flood protection, according to the governor’s office. Roughly 40,000 of those policies are up for renewal each month, meaning homeowners whose policies expire during the shutdown won’t be able to renew through the NFIP.

The number of homes covered by NFIP policies has increased statewide since 2016, when Louisiana was hit with record-breaking floods. NFIP coverage spiked especially in parishes devastated by the floods: 35.7 percent of Livingston homeowners, 34.3 percent of Ascension homeowners and 21 percent of East Baton Rouge homeowners were covered under NFIP as of December 2017, according to the most recent data available from the Louisiana Department of Insurance.

Each of those parishes saw at least a 35 percent increase in the number of homes covered under NFIP between December 2016 and December 2017.

The most immediate effects of FEMA’s decision will be felt by home buyers and sellers who need federally backed flood insurance to close property deals. Any real estate closings requiring NFIP insurance will be on hold during the shutdown.

David Boneno, general counsel for the Louisiana Bankers Association, said FEMA’s announcement will limit local banks’ ability to issue mortgage loans for home purchases. Federal law requires properties in special flood hazard areas have flood insurance, and banks must ensure property owners have flood insurance before making loans where property is used as collateral, he said.

“In Louisiana, as you can imagine, there are many properties impacted by flood zones due to the nature of our geography,” said Boneno. “This program is very important to banks in Louisiana and their customers. We hope it’s resolved very quickly for the benefit of all impacted.”

Special hazard zones can exist anywhere there’s a low-lying area or proximity to a waterway or body of water, Boneno said. Residents in the coastal areas of southeast Louisiana will be some of the hardest hit by FEMA not authorizing policies.

Top stories in Baton Rouge in your inbox

Twice daily we'll send you the day's biggest headlines. Sign up today.

Kelli Walker Starrett, senior vice president of the New Orleans Metropolitan Association of Realtors, said the situation is a “hot mess” and by midday Thursday she had heard of at least 25 home sales that couldn’t close because of FEMA’s new guidance.

Residential property transactions in flood threat zones A and AE, with at least a 1 percent chance of flooding each year, would be stalled, Starrett said. Significant parts of Ascension, East Baton Rouge, Jefferson, Livingston, Orleans and St. Bernard parishes, among others, are in those zones.

Starrett said her organization is working with area real estate agents to develop interim solutions, including writing contract extensions into client paperwork in case the shutdown effects the property closing. Besides that, looking into private insurance is the only other solution, she said.

Donna Villar, president of the Greater Baton Rouge Association of Realtors, said FEMA’s guidance was a blind side hit after the holidays.

“This is our slowest time of the year, thank goodness. Our business normally picks up about the third week of January, so we still have some time to figure this out,” she said.

FEMA’s guidance also came as a shock to Louisiana’s congressional delegation. Lawmakers had cheered the extension of the NFIP Dec. 21, confident they had secured flood insurance coverage for millions of Americans even as the federal government entered a partial shutdown. Congress reauthorized the program to May.

The NFIP underwrites flood insurance policies for millions of Americans and is currently struggling under billions of dollars of debt after several years of historic hurricanes and flooding.

Lawmakers have struggled to rein in the NFIP’s growing debt and disagree about how it should be restructured. The five-month extension was the 10th stop-gap funding measure since the program’s long-term funding expired Sept. 30, 2017.

Republican Rep. Steve Scalise, the Majority Whip, told The Advocate FEMA’s decision broke with precedent established during the October 2013 government shutdown, when FEMA continued to issue and renew policies. Scalise said he spoke with FEMA administrator Brock Long on Thursday and urged him to reverse the decision.

“Precedent and the intent of Congress should be respected,” Scalise said. “We were supposed to adjourn at 5:30 p.m., but the renewal of flood insurance failed and so we came back and had an additional vote series, that wasn’t going to happen originally, just to renew the NFIP. And the president signed it into law.”

Republican Sen. Bill Cassidy sent a letter to Long challenging FEMA’s rationale for the funding halt, stating selling and servicing flood insurance policies doesn’t require appropriations, and that any payouts necessary could be covered through fees and premiums.

“It makes no sense to impede the selling of NFIP policies until the interruption cascades to a level where a clear market impact is demonstrable – only in Washington, D.C., would this seem like a good idea,” Cassidy wrote. “The application of the exception under the Antideficiency Act and the resumption of the sale of flood insurance policies needs to happen immediately.”

Sen. John Kennedy, who sponsored the NFIP reauthorization bill, said the president signed his bill “to prevent unnecessary chaos like this” and he’s working with Long and the Department of Homeland Security on a solution.

Advocate staff writer Faimon Roberts contributed to this report.

Follow Katie Gagliano on Twitter, @katie_gagliano.