After months of mostly behind-the-scenes lobbying, the financial industry is urging Mississippi officials one last time to hand out $3 billion of Hurricane Katrina-related aid through mortgage servicers as rebuilding is done, rather than directly to homeowners.
Though the push is aimed at Mississippi, industry officials are not optimistic the state will change its plan. But they do still hope to sway Louisiana, which is finalizing plans to distribute billions of dollars of grants and also appears to be leaning toward giving the money directly to borrowers.
In a letter dated June 16 to the Mississippi Development Authority, three financial services trade groups argued that letting the money flow directly to homeowners would fly in the face of congressional intent and what is best for the region.
If the money is not doled out through reconstruction-linked escrow accounts, the argument goes, more homeowners would use the money for purposes other than rebuilding, and more of those who are trying to rebuild will fall victim to abusive contractors.
Neither outcome, of course, would be good for their home lenders, nor would leaving it up to borrowers to use the money to settle any past-due loan obligations.
The authority did not return a call for comment by press time, but one major issue Mississippi has aired about giving out funds through servicers is a fear that doing so could trigger a need for environmental studies, such as those required by the National Environmental Policy Act.
Performing the studies would add administrative costs and slow the process, but if the state does not perform them, it could run afoul of various laws and regulations and have to give the money back to the federal government.
Francis Creighton, a director of government affairs at the Mortgage Bankers Association (one of the three trade groups), who helped draft the 10-page letter, said the industry believes there is little chance Mississippi will change its approach, as it is expected to begin disbursing funds next month.
Still, the three groups that sent the letter - the MBA, the Consumer Mortgage Coalition, and the Financial Services Roundtable - wanted "to go on the record" with their concerns, he said.
He cited congressional testimony last week in which the Government Accountability Office said that as of February, about 16% of the Federal Emergency Management Agency's Katrina aid went to fraudsters or was misused on things like jewelry, vacations, and adult entertainment.
Mississippi's choice will result in a "major national scandal," Mr. Creighton predicted. "When it does and they ask us, we will be giving them this letter."
Mr. Creighton also argued that the industry's interests are "uniquely aligned" with those of the communities hit by last year's hurricanes, as well as the purpose of the special community development block grant that is the source of the homeowner assistance.
Lenders need even homes without mortgages, to be rebuilt so their collateral on the same block can regain its worth, he said.
Unusual Allies
Advocacy groups have been on the side of giving servicers the role they want. Several - including Catholic Charities USA, the Consumer Federation of America, the National Association for the Advancement of Colored People, and the National Community Reinvestment Coalition - lobbied the Mississippi agency on the issue in an April letter.
They said a disbursement system like the one normally used for flood and homeowner's insurance proceeds, in which servicers dole out funds slowly as work gets done, could protect consumers against contractor fraud and substandard rebuilding. They argued for this approach despite a slew of complaints from the region about servicers' disbursements of the insurance funds.
Much of the industry groups' letter deals with the technical issue of the level of environmental studies (some possibly site-specific) required with either approach to handing out the grants.
About 30,000 individuals would receive up to $150,000 each under the state's plan.
According to the letter, which cites extensively the development authority's environmental assessment for the state's plan, Mississippi believes that by giving the money directly to homeowners, with few requirements on how it is used, it can claim it is too hard to say exactly what the impact would be, and so make many of the studies unnecessary.
The letter argues that the authority's conclusion is based on "conflicting, unsupported, and unexplained assertions," and that direct-to-borrower payments without enough reviews would actually break the rules.
On the other hand, the letter says, the regulatory burden of the "escrow approach" is being overstated; in particular, approved short cuts are available to ensure site-by-site reviews are not necessary.
The industry tried and failed to get legislation giving explicit safe harbor to its approach, and the Department of Housing and Urban Development has resisted giving guidance supporting it.
The letter also said a direct-grant program makes it impossible to monitor the use of the funds, as required.
A HUD spokesman said that in general the issues have "to be hammered out at the state and local level."
The industry sees the details in Louisiana as a potentially bigger problem. (Its plan calls for a slightly higher level of control over homeowners' use of the funds, which can include moving, but not enough for the industry.)
Mr. Creighton said that once Mississippi starts releasing its grants, Louisiana would face pressure to follow quickly. Because of the higher levels of apparently permanent displacement there, and because more Louisianans had no mortgages and thus have less incentive to rebuild, the grant money is at more risk of being put toward other purposes, he said.
The higher figures involved - Louisiana already has $3.5 billion of block grant funds slated to go homeowners, and it is expected to get about $4 billion more from additional assistance Congress approved recently - is probably another reason for the industry's greater concerns.
In the Queue
David G. Kittle, the president of Principle Wholesale Lending Inc. in Louisville, has been nominated to be the MBA's next vice chairman. The nomination puts Mr. Kittle in line to become the MBA's chairman in late 2008. His formal election will take place at its annual conference in October.
John Robbins of Wachovia Corp.'s American Mortgage Network Inc., is the MBA's chairman-elect. He is slated to succeed Regina M. Lowrie of Gateway Funding Diversified Mortgage Services LP, as the group's chairman in October.
Kieran P. Quinn of Credit Suisse's commercial mortgage unit, would succeed Mr. Robbins.
