WASHINGTON — A variety of approaches are being floated in Congress and among banking industry officials to reinforce mortgages on property damaged by Hurricanes Katrina and Rita, but none have universal support.
House Democrats on Tuesday introduced legislation that would allow Katrina and Rita victims to buy flood insurance retroactively. The measure targets property owners who were not subject to the mandatory purchase requirements of the national flood insurance program.
Louisiana’s U.S. senators, Mary Landrieu and David Vitter, last week proposed establishing what they call a “multibillion-dollar Home Business and Mortgage Protection Fund.”
The program, part of a comprehensive reconstruction bill, would provide grants to financial institutions to cover missed, past-due, or late mortgage payments for six months on properties in areas affected by Katrina, which hit parts of Louisiana, Mississippi, and Alabama on Aug. 29. In exchange for the federal money, the lender would not be allowed to foreclose if the borrower could show financial hardship.
The program would target people who lost their jobs as a result of the hurricane and do not have the means to pay their mortgages. It would not assist people whose property was destroyed.
“That would have to be dealt with by some other program,” said Steve Verdier, the director of congressional relations at the Independent Community Bankers of America.
“A bank would only want to use that in a situation where they thought, in the six-month period, a person could get back on their feet and get current on their mortgage,” Mr. Verdier said. “That is probably not going to fit the bill for some of the properties … that were just blown away … and where it’s going to take a long time to get things rebuilt.”
Different sectors of the industry are pushing their own, sometimes conflicting ideas.
The Consumer Mortgage Coalition, which represents national mortgage lenders, last week circulated a memo to gauge other industry groups’ interest in some concepts.
They include pushing Congress to: sell retroactive flood insurance coverage to hurricane victims outside of government-designated flood zones; authorize temporary federal funding of mortgage and rental payments; increase the government guarantee on VA loans and relax certain requirements for FHA-insured loans; and have the government take over loans on property with heavy toxic waste from the storms.
Most of the major banking trade groups say they are still weighing what government assistance they will request for their loan portfolios. Diane Casey-Landry, the president of America’s Community Bankers, said the group was “still in a damage-assessment mode in terms of what it means for lenders.”
The idea of extending the federal flood insurance program retroactively was met with resistance from the Bush administration and consumer advocates, and received only lukewarm interest from a number of banking industry officials contacted Wednesday.
“It’s something we think would do real violence to the program,” said Ed Pasterick, senior adviser with the mitigation division of the Federal Emergency Management Agency’s flood insurance program. “It is effectively using the flood insurance program as a vehicle to pour disaster recovery to people that weren’t covered. … People will think that somehow ‘I don’t have to buy flood insurance, and the government will take care of it.’ ”
FEMA’s position, Mr. Pasterick said, is that “if you decide that you are in fact going to help people recover, even if they don’t have insurance, certainly do it directly through disaster insurance and don’t distort the insurance program in the process.”
The Consumer Federation of America also opposes the idea.
Lenders argue that they cannot price the risk of such massive, though rare, disasters. Instead they have proposed establishing a fund for the federal government to buy loans of borrowers affected by disasters, or creating a pool to spread the risk over all holders of improved property.
