Lack Of Insurance May Be Next Disaster

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Hundreds of credit unions and banks could be pushed to the brink of failure by Hurricane Katrina because the majority of property owners in the affected areas lived outside the 100-year flood plain, so are uninsured for the catastrophic flooding that resulted from the massive storm, authorities said last week.

"Most of the flooding was outside the designated flood zone," said Rep. Spencer Bachus (R-AL) during a hearing on hurricane relief.

As a result, CUs and banking representatives told Bachus their constituents are going to need some kind of government assistance to pay for the billions of dollars in flood claims for uninsured properties, or else be left holding major losses.

Such federal assistance, said Charles Elliott, president of the Mississippi CU Association, "should be a component" of any disaster relief bill. "We have people outside the flood plain who were told by their agents 'You don't need flood insurance. It's a waste of money,'" Elliot told members of the House Financial Subcommittee on Financial Institutions, which is crafting a disaster relief bill.

The failure of a government assistance package, said Diane Casey-Landry, head of America's Community Bankers, could be dire for banks, credit unions and other lenders. "Otherwise, borrowers will walk away from the loan and leave the losses with banks," she said.

"Fundamentally, what we're talking about is some sort of government assistance," said David Gibbons, senior executive vice president for HSBC North America, one of the largest mortgage lenders in the country.

Bachus, the chairman of the panel, said he believes some kind of coverage for non-insured properties ought to be part of an assistance package. "We're going to spend all that money (on a financial assistance bill) that ought to be a component of it."

NCUA Chairman JoAnn Johnson said the federal regulator/deposit insurer was aware of the looming problem on flood insurance. "Maybe this is an area where the federal government can step in and provide some assistance," she said.

According to Ed Pasterick, a senior official with the National Flood Insurance Program, which is administered by the Federal Emergency Management Agency, there are about 275,000 properties in the four Louisiana parishes, and all of Alabama and Mississippi that are covered under the FEMA flood program, the only one that provides flood insurance for homeowners. Currently 4.6 million properties are covered nationwide under the FEMA program.

FEMA officials, mindful that Hurricane Katrina will probably require the most claims under its program, 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. While it is too soon to tell just how many properties are not insured in the hurricane's wake, Pasterick conceded the numbers will be large.

There are a few options for uninsured homeowners. For one, FEMA will provide grants of up to $25,000 for homeowners whose property was destroyed in the disaster. And the U.S. Small Business Administration will provide disaster loans for businesses and homes of up to $200,000, Pasterick said.

The flood insurance was created by the federal government because private insurers refused to provide coverage for some floodplains, specially in scenic coastal areas. A disaster relief bill is also expected to provide indemnification for credit unions and banks that are cashing checks, vouchers and other forms of assistance for non-members/customers.

Lawmakers are also considering provisions that would temporarily waive the Federal Reserve's fees for wire transfers and cash deliveries to credit unions and banks in the affected areas. They are also considering a provision that would allow lenders to make so-called fresh start loans to borrowers that would allow loans to accrue interest during suspended principle payments, a practice that is currently barred.

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