Gulf State lawmakers called on Congress last week for a massive bailout of lenders and property owners now recovering from the unprecedented flooding following Hurricane Katrina.
Mississippi Congressman Gene Taylor urged members of the House Financial Services Committee to join his bid to allow hundreds of thousands of uninsured property owners in New Orleans, Mississippi and Alabama to buy flood insurance retroactively through the National Flood Insurance Program. Otherwise, warned the Democratic lawmaker, hundreds of small credit unions and banks will be left holding the bag for the huge flood losses, forcing many of them out of business.
Rep. Barney Frank, the senior Democrat on the Financial Services Committee, also called for some kind of bailout of uninsured property owners. "By helping them, we also avert serious damage to our financial system," said the Massachusetts Congressman. "We don't want to see smaller banks and credit unions forced out of business."
Frank, whose own state was hit by flooding over the past two weeks, warned that the lack of coverage could cause major disruptions to the financial system. "We will see banks fail. We will see credit unions go under. It will cost the government (significant money) in (deposit) insurance."
But just as importantly, stressed Frank, the costs will fall more on smaller institutions, increasing the trend towards greater concentration in the financial system.
Taylor, whose home state was one of the worst hit by Hurricane Katrina, has been pushing over the past month for his bill that would allow the hundreds of thousands of uninsured home- and property-owners to buy flood insurance through the NFIP retroactively, in exchange for 10 years of premiums and a 5% penalty, all of which could be paid by any claims they earn. "My legislation," said Taylor last week, "The Hurricane Katrina and Hurricane Rita Flood Insurance Buy-In Act, is a fair way to help homeowners who did not purchase flood insurance because they were poorly advised of their risk by their government and by their insurance agents."
The proposal, he notes, makes only those properties eligible that lie outside the special flood hazard areas delineated by the Federal Emergency Management Agency, which runs the flood insurance program. The vast majority of the flooded properties, Taylor noted, lay outside those areas and were not required by law to carry flood insurance. The buy-in would cover the structure, not the contents of the properties.
The proposal, if adopted, would swamp the flood insurance program, which has already estimated more than $20 billion in claims from the two hurricanes, more than 10 times its current funding.
But Taylor's proposal, currently the only one introduced to address the massive shortfall in flood insurance, has attracted little support so far. About three-dozen lawmakers have signed on as co-sponsors, but only a handful from the Republicans, all from the three affected states. Republican leaders, who will certainly play the major role in shaping any kind of insurance bailout, have been slow to formulate any plans, as they wait to determine the full extent of the damages and the need for financial support for lenders and property owners.
Louisiana Congressman Richard Baker, a powerful force within the Republican Party, last week introduced an alternative to Taylor's proposal that would create a Louisiana Recovery Corp., that would be empowered to issue tax-free revenue bonds that would be used to buy huge tracts of flood-damaged New Orleans properties and finance rebuilding of levees, infrastructure, and fund environmental clean-up of polluted areas.
Baker, who has been at the center of the Katrina relief efforts, noted the record flooding that recently hit New England, and called for major reforms to the flood insurance program, including a risk-based premium system and broader requirements for flood insurance. He urged mandatory flood insurance for those properties most likely to be affected by flooding and higher coverage for properties insured by the national program, which only covers $250,000 of losses on structures and $100,000 on contents.
