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 thehouse." That is the problem many Gulf Coast residents--and theirmortgage lenders--are confronting as a result of the devastationwreaked by Hurricane Katrina. And, by implication, Congress and theinsurance industry are wrestling with as well.

Homeowners policies cover damage from winds generated byhurricanes and other natural disasters but, specifically, not waterdamage. 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 whitepaper being scrutinized by members, is expected to conclude that,"unless the federal government acts quickly to stabilize affectedcommunities, it will become very difficult for homeowners to obtaincredit [mortgages] in these areas in the future."

The group is sending a legislative proposal to Congress underwhich the Federal Emergency Management Association would provideretroactive flood insurance coverage to all homeowners affected byHurricane Katrina to help them rebuild.

Anne Canfield, executive director of the Washington-basedcoalition, said that under the proposal, affected residents couldreceive flood insurance settlements up to the maximum coveragelimits allowed under the National Flood Insurance Program, whichmakes federally backed flood insurance available to homeowners,renters and businessowners in areas that adopt certain floodplainmanagement ordinances.

However, Republican leaders of the House Financial ServicesCommittee, which has original jurisdiction over the bill, would notsay if they would support it. A staff official representing Rep.Robert Ney, R-Ohio, would say only that the congressman is "stillworking through" the issues and waiting for numbers from theDepartment of Housing and Urban Development. The staffer noted thatthe committee held a hearing last week and has scheduled anotherfor this week on housing issues, especially finding homes for thedisplaced people. Overall though, "we're still trying to get holdof the scope of the problem," the Ney staffer said.

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

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

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

Rep. Spencer Bachus, R.-Ala., chairman of Financial Institutionsand Consumer Credit subcommittee in the House, said he has beentold that homeowners in other areas say they didn't need to buyflood insurance because their homes weren't located in 100-yearflood plains.

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

Ed Pasterick, a senior official with NFIP, which is administeredby FEMA, said there are about 275,000 properties in four affectedLouisiana parishes that are insured under NFIP, and that all ofAlabama and Mississippi are covered under the program. Currently4.6 million properties are covered nationwide under the FEMAprogram.

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

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

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

In testimony before a House Financial Services Subcommitteebriefing on how insurers are dealing with Hurricane Katrina, arepresentative of the Council of Insurance Agents and Brokerssuggested that one way to deal with the issue of who must pay whenthere is a question of whether a home or business is damaged bywind or floods, is to follow the principle of "following form"applied by the insurance industry to excess and reinsurancepolicies.

Markham McKnight, president of insurance services ofBankcorpSouth and an executive of Wright & Percy, an insurancebrokerage division in Baton Rouge, suggested in his testimony thatflood insurance be made to conform to the policy terms andconditions of the homeowner's windstorm policy or commercialproperty policy. Under that process, flood insurance policy termswould mirror a homeowner's policy terms or a commercial propertypolicy's terms.

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

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

Under the system that now exists, he said, the consumer must sueboth insurers to get any coverage. "There should be some mechanismrequiring the carriers to resolve disputes between each otherwithout involving the consumer," he said, suggesting the creationof a commission or mandating arbitration.

Caption:

With estimates of the percentage of homeowners that do not haveflood insurance varying, there are few options for the uninsuredwith FEMA grants only providing up to $25,000 for homeowners whoseproperty was destroyed in the disaster.