WASHINGTON - Mortgage bankers are relieved that Congress may soon give them authority to impose flood insurance on borrowers whose properties are mapped into flood zones after a mortgage is originated.
In California, some lenders are being sued for doing that without explicit federal authority.
Two bills, introduced by Sen. John Kerry, D-Mass., in the Senate and Rep. Joseph Kennedy, 2d. D-Mass, in the House, would resolve that problem.
Current Law
They are expected to become law later this year or early next year.
Current federal law requires lenders to place flood insurance when the mortgage is originated or the conditions of the loan are changed.
It says nothing about what they may do if properties are remapped into flood zones under other circumstances.
Fannie Mae and Freddie Mac, however. expect lenders to place flood insurance on loans when properties are remapped.
This put some mortgage bankers in a Catch-22 situation in Sacramento County, according to Scott H. Whittle. senior vice president of Lowell, Smith & Evers in Van Nuys and secretary of the California Mortgage Bankers Association.
Large portions of Sacramento were designated flood hazard areas in 1990.
Fannie Mae and Freddie Mac wrote to lenders, reminding them that loans held or securitized by the two companies must have flood insurance. Lenders told borrowers to get flood insurance or face having it placed forcibly.
Five Firms Sued
Many borrowers complained to the Sacramento district attorney. Arguing that federal law did not give lenders the power to place flood insurance, the district attorney sued five companies - Fleet Mortgage Corp., Arcs Mortgage Inc., Shearson Lehman Mortgage Goldome Realty Credit Corp, and Guild Mortgage Corp.
Word is that Orange County and Los Angeles County will have new flood maps next year, Mr. Whittle said, and lenders expect to face the same dilemma they faced in Sacramento.
By explicitly giving lenders authority to place flood insurance in remapped areas, the bills would prevent such confusion in the future.
In the Sacramento case, Fannie and Freddie offered only general assurances of help to lenders at first, Mr. Whittle said.
But recently, leading bankers lobbied the presidents of both companies, he said.
Fannie Mae and Freddie Mac responded with letters to lenders involved in the suit. They have offered to help fight future litigation if lenders are sued for trying to abide by their contracts with Fannie and Freddie.
Fleet has settled the Sacramento suit, and another company is expected to follow.
Both the Senate and House bills also would require the Federal Emergency Management Agency to publish notices of map changes in the Federal Register.
Currently, the agency does not do so, and lenders hire other companies to decipher the agency's flood maps and alert them to changes.
Claudia Manly, senior vice president of loan administration at Arcs Mortgage, called the current process a "nightmare," and said she would welcome better notice of the agency's changes.
"People aren't sure how it works," she said. "They've either elected to ignore [the flood insurance provisions] or they're not able to follow them."
Finally, the bills would require lenders to escrow flood insurance payments. The House bill is more demanding. It would require lenders to put flood insurance in escrow, even if they don't maintain an escrow account for property taxes and other insurance unless state laws prohibit escrow accounts.
The Mortgage Bankers Association is fighting the provision, said Sharon Canavan, staff vice president of the trade group.
Lenders don't mind it as much.
"Philosophically, I don't like mandates." said Carl L. Mirowitz of Delmar Financial Co., a small lender in flood-hit St. Louis, Missouri.
But "I wouldn't object to escrowing flood insurance alone," he said.
If anyone is unhappy, it appears to be Fannie Mae and Freddie Mac.
That's because both bills would give the Office of Federal Housing Enterprise Oversight, which monitors their safety and soundness, new responsibilities to make sure that Fannie's and Freddie's loans have flood insurance.
Both companies protested the provision in hearings last month on Sen. Kerry's bill.
