Mortgage Group Proposes Retroactive FEMA Payments

By MATT BRADY AND ARTHUR D. POSTAL, WASHINGTON BUREAU

"We'll give you a new roof, but you will have to rebuild the house." That is the problem many Gulf Coast residents--and their mortgage lenders--are confronting as a result of the devastation wreaked by Hurricane Katrina. And, by implication, Congress and the insurance industry are wrestling with as well.

Homeowners policies cover damage from winds generated by hurricanes and other natural disasters but, specifically, not water damage. The latter coverage is provided by the federal government, with a limit of $250,000 per house.

The Consumer Mortgage Coalition, in a yet-to-be-released white paper being scrutinized by members, is expected to conclude that, "unless the federal government acts quickly to stabilize affected communities, it will become very difficult for homeowners to obtain credit [mortgages] in these areas in the future."

The group is sending a legislative proposal to Congress under which the Federal Emergency Management Association would provide retroactive flood insurance coverage to all homeowners affected by Hurricane Katrina to help them rebuild.

Anne Canfield, executive director of the Washington-based coalition, said that under the proposal, affected residents could receive flood insurance settlements up to the maximum coverage limits allowed under the National Flood Insurance Program, which makes federally backed flood insurance available to homeowners, renters and businessowners in areas that adopt certain floodplain management ordinances.

However, Republican leaders of the House Financial Services Committee, which has original jurisdiction over the bill, would not say if they would support it. A staff official representing Rep. Robert Ney, R-Ohio, would say only that the congressman is "still working through" the issues and waiting for numbers from the Department of Housing and Urban Development. The staffer noted that the committee held a hearing last week and has scheduled another for this week on housing issues, especially finding homes for the displaced people. Overall though, "we're still trying to get hold of the scope of the problem," the Ney staffer said.

Ms. Canfield, whose group represents such large mortgage lenders as Wells Fargo and Citigroup, said the preliminary estimate of lenders is that 35 percent of New Orleans homeowners do not have flood insurance.

Her members are still getting the overall picture together, she added. The issue is not the $250,000 ceiling on flood insurance payments, she noted, because the average price of a house in that area is $107,000. Instead, it's the lack of coverage.

She said her group believes people in New Orleans didn't buy flood insurance because FEMA advised that flood levees were adequate to protect the city.

Rep. Spencer Bachus, R.-Ala., chairman of Financial Institutions and Consumer Credit subcommittee in the House, said he has been told that homeowners in other areas say they didn't need to buy flood insurance because their homes weren't located in 100-year flood plains.

As a result, Ms. Canfield said, "people now owe money on a mortgage for a home that no longer exists."

Ed Pasterick, a senior official with NFIP, which is administered by FEMA, said there are about 275,000 properties in four affected Louisiana parishes that are insured under NFIP, and that all of Alabama and Mississippi are covered under the program. Currently 4.6 million properties are covered nationwide under the FEMA program.

In this entire area, he said, the program insures 35 percent of the structures, with a higher percentage--48 percent--in Louisiana.

FEMA officials, mindful of the substantial claims from Hurricane Katrina, were successful in convincing Congress last week to double the funding for the flood insurance program to $3.5 billion a year. Through last week there were about 120,000 claims under the FEMA program.

There are a few options for uninsured homeowners, Mr. Pasterick said. The first stop is the U.S. Small Business Administration that provides disaster loans for businesses and homes of up to $200,000, he said. For those who don't qualify for the SBA program, FEMA will provide grants of up to $25,000 for homeowners whose property was destroyed in the disaster.

In testimony before a House Financial Services Subcommittee briefing on how insurers are dealing with Hurricane Katrina, a representative of the Council of Insurance Agents and Brokers suggested that one way to deal with the issue of who must pay when there is a question of whether a home or business is damaged by wind or floods, is to follow the principle of "following form" applied by the insurance industry to excess and reinsurance policies.

Markham McKnight, president of insurance services of BankcorpSouth and an executive of Wright & Percy, an insurance brokerage division in Baton Rouge, suggested in his testimony that flood insurance be made to conform to the policy terms and conditions of the homeowner's windstorm policy or commercial property policy. Under that process, flood insurance policy terms would mirror a homeowner's policy terms or a commercial property policy's terms.

For example, he said, flood insurance does not "follow form" for commercial property because it has no provisions to cover business interruption, extra expenses from an event and damages stemming from a lack of the presence of civil authorities (for example, looting).

The need for a dispute resolution mechanism to settle differences between flood and p-c insurers was highlighted by Katrina's aftermath, he noted. He said it is possible that both carries could deny claims even though there is clearly a loss.

Under the system that now exists, he said, the consumer must sue both insurers to get any coverage. "There should be some mechanism requiring the carriers to resolve disputes between each other without involving the consumer," he said, suggesting the creation of a commission or mandating arbitration.

Caption:

With estimates of the percentage of homeowners that do not have flood insurance varying, there are few options for the uninsured with FEMA grants only providing up to $25,000 for homeowners whose property was destroyed in the disaster.

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Mortgage Group Proposes Retroactive Payment Plan For Flood Coverage

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