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Lenders Seek Federal Assistance On Flood-Damaged Properties

In a bid to avoid losses that could measure in the billions of dollars, lobbyists for major banks are shopping a proposal on Capitol Hill to secure a federal bailout from costs related to Hurricane Katrina.

The measure, still taking shape, would have the National Flood Insurance Program, run by the federal government, retroactively cover thousands of flood-damaged homes, saving banks from having to foreclose on what could be a staggering number of mortgages.

Lobbyists for leading lenders with big investments in the ravaged areas are seeking to pin responsibility for the damages on the Federal Emergency Management Agency, whose outdated flood maps they blame for the lack of flood insurance.

“In the city of New Orleans, FEMA apparently did not declare a good part of New Orleans as a flood zone because they determined that the residents would be protected by the levees,” Anne Canfield, a lobbyist for a coalition of mortgage banks, wrote last week in a memo to member companies.

Noting that federal spending on Katrina recovery efforts could top $200 billion, Canfield added, “Why not have some of those funds be used to actually help the mortgage industry and its consumers, many of whom became victims because of government failures?”

In an interview, Canfield said her clients would survive the crisis, but the long-term welfare of consumers would be another issue.

“If people walk away, they’ll have a foreclosure on their record, and their credit will be ruined,” she said. “It seems to us helping homeowners in such an unusual situation should be a priority, particularly because that will lead to the stabilization of communities.”

Though there is not yet an accurate price tag for Katrina’s destruction, most estimates have placed losses in the tens of billions of dollars. Already, a debate is erupting over how much of the bill insurers should cover.

Insurers argue that most of the damage was caused by flooding, meaning it would not be included in most homeowners’ private insurance polices. Public officials and mortgage banks, however, contend that most damage was the result of hurricane winds.

Securing tax dollars to pay the tab could help both industries ease a protracted legal fight.

An official at the Consumer Federation of America, a leading consumer group, called the mortgage industry’s effort a “very aggressive proposal to try to protect their mortgage payments.”

“They’re looking for any angle they can find to get the taxpayers to foot the bill, said Robert Hunter, a former director of the National Flood Insurance Program who’s now with the federation.

Industry representatives so far have only had informal conversations with lawmakers on the issue, raising it with House Ways and Means Chairman Bill Thomas (R-Calif.) and Rep. Bob Ney (R-Ohio), chairman of the House Financial Services subcommittee on housing and community opportunity, according to Canfield’s memo.

But top Republicans appear cool to the idea.

“A proposal such as this would be a non-starter in our view,” said an aide to a senior Republican on the House Financial Services Committee. “If it were to go forward, it would in all likelihood bankrupt the flood insurance program. The number one priority right now is making sure the program stays in existence to help not just the victims of this catastrophe but future communities around the country who would be affected by floods.”

Last week, House Majority Whip Roy Blunt (R-Mo.) told the Wall Street Journal, “We don’t want to create the idea that somehow the federal government is going to recreate everything destroyed by Katrina. People who didn’t have insurance shouldn’t come out as well as those who did.”

Canfield said she hoped skeptical lawmakers would reconsider. “You’ve got a very unusual situation here that’s going to require some unusual measures,” she said.

The disaster comes at a sensitive time for the mortgage industry, which is facing Congressional scrutiny over whether race plays a role in loan pricing. Canfield acknowledged as much in her memo last week, calling the situation a “public relations nightmare.”

“This will all unfold during a time in which the industry will continue to be charged by consumer advocates as being predatory lenders, and now, as a result of the HMDA issue, have the mortgage discrimination issue laid at our feet,” she wrote.

Canfield’s group, the Consumer Mortgage Coalition, does not disclose its membership, but describes itself as a “trade association of national mortgage lenders, servicers and service providers.”

The group on Wednesday tried to find support for its proposal by circulating a draft to several trade associations, including the Mortgage Bankers Association of America and America’s Community Bankers. Both groups were still reviewing the draft late Wednesday.

“Insurance is about carrying the coverage before an event happens,” said Kurt Pfotenhauer, a top lobbyist for the MBAA. “But what you’ve got here is a question of whether FEMA was in some way responsible for who should or shouldn’t have had flood insurance. This would be one possible way to address the issue of who’s at fault and who’s on the hook for losses.”

Julie Rochman, of the American Insurance Association, said the accuracy of the federal flood maps is a “structural question for Congress and FEMA to deal with.” Regardless, she said, mortgage lenders bear the ultimate responsibility for requiring borrowers to buy flood insurance.

Under the draft, all affected homeowners could receive settlements up to the maximum of $350,000 allowed by the NFIP, whether or not they owned a flood insurance policy before the storm. Those who were not covered would simply have the cost of premiums they would have paid deducted from their settlement.

It is unclear whether the NFIP has enough money to cover the 275,000 properties now covered under the program. Congress last week extended its borrowing limit to $3.5 billion, but some estimates placed flood-insured damage at $20 billion. FEMA, which runs the NFIP, did not return calls for comment.

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