CONCLUSION

Freddie Mac applauds the intent of S. 1405 to improve the flood insurance program. We have noted our efforts, as a secondary market participant, to ensure that flood insurance is carried on every mortgage that we purchase where required by law or Freddie Mac guidelines. We have also noted our technical suggestions to the language of the bill as introduced. As always, Freddie Mac stands ready to work with you and your staff on this very important issue.

STATEMENT OF KENNETH L. AUSTIN, JR.

EXECUTIVE VICE PRESIDENT, WENDOVER FUNDING, INC.

Mr. Chairman and Members of the subcommittee, I am Kenneth L. Austin, Jr., Executive Vice President of Wendover Funding, Inc., located in Greensboro, North Carolina. I am also currently serving as Vice Chairman of MBA's Loan Administration Committee.

MBA appreciates the opportunity to appear before you today to testify on S. 1405. MBA supports the objectives of the National Flood Insurance Program and believes that flood insurance is essential to protecting both the property owner and the lend

er.

In the past, MBA believes that there was little emphasis placed on that program and that has contributed to low compliance. However, I strongly believe that situation has changed in the last several years. I believe that mortgage lenders and servicers, in response to heightened interest in the program are making significant, honest efforts to comply.

However, these efforts have been partially thwarted by the lack of clear legal authority to require flood insurance when there is a remapping after the loan is originated. Mortgage servicers are waiting for clear direction from Congress as to what, precisely, their servicing responsibilities are. Given the potential expense, this is understandable.

Mortgage servicers need to have the tools in order to make this program work. Servicers need to know precisely what form of notice consumers should receive when their property has been found to be within a flood zone. Servicers need to have standard procedures to follow when notifying borrowers about a flood zone change and when they have to force place insurance if the borrower fails to purchase the insurance.

S. 1405 contains guidelines for these notices and for handling consumer disputes about a flood zone designation. These provisions need to be clarified to cover mortgage bankers.

This provision also needs further clarification to preempt State or local laws and regulations that conflict with these requirements. Lenders and servicers should only need to comply with one set of requirements established in the Federal statute. Some State authorities have questioned the legality of requiring flood insurance after the mortgage has been executed, as well as the method of notification, the mechanism for resolving disputes over the flood zone determination, and the requirement that borrowers purchase the insurance at their own expense.

Finally, current law requires a lender to make a flood zone determination only at the time that the loan is originated. After origination, the lender must maintain the insurance for the life of the loan. However, current law does not require lenders or servicers to review loans during their terms to determine if a remapping has brought a property within a flood zone. Although S. 1405 clarifies the law somewhat, MBA is extremely concerned that as currently drafted, it does not extend this clarification to mortgage banking servicers.

The mortgage banking industry strongly supports clarification of these issues in order to allow servicers to enhance their efforts to upgrade compliance with the flood insurance program.

MBA is pleased to see that S. 1405 requires FEMA to publish all map changes, revisions, and amendments. This will give lenders and servicers a single source to rely upon to determine whether mapping changes have taken place.

We believe the most appropriate balance of responsibilities is to provide lenders with the tools to carry out the compliance objectives laid down by S. 1405. Enhanced guidance and explicit legal authority are key to putting lenders in the position to achieve these objectives.

I would like to address another issue. It is often stated that mortgage bankers are not covered by the Federal Flood Insurance Program. It is true that non-bank and non-thrift lenders are not directly mandated by the flood insurance statute to require flood insurance. But mortgage bankers are regulated by function.

By this I mean that mortgage bankers are quite clearly, although indirectly, drawn into compliance. They sell the mortgages they originate to Fannie Mae and Freddie Mac. And they must originate FHA and VA mortgages in compliance strict regulations. Current law requires, and S. 1405 underscores, that FHA and VA loans, as well as loans purchased by Fannie Mae and Freddie Mac must carry flood insurance if the property is located in a flood zone, and that the flood insurance must be maintained for the term of the loan.

I would like to turn now to the compliance requirements. S. 1405 requires lenders to maintain a standardized flood and erosion hazard determination form in every loan file. This form must be less than five years old. MBA has several concerns about these requirements.

First, keep in mind that S. 1405 imposes a significant new servicing responsibility, which is to extend coverage to properties where there has been a remapping after origination. Today, a lender is only required by the law to check a loan at origination and then to maintain coverage.

MBA supports expansion of the law to cover post-origination changes. However, in meeting that expanded compliance burden, we hope that this committee will minimize the impact on outstanding loans that are currently in servicing portfolios.

MBA does not believe that servicers should be required to update existing loan files once the standard hazard determination form is created. This requirement should cover loans originated after the standard hazard determination form is developed. Otherwise, servicers are essentially subject to a de facto requirement to perform a portfolio review in order to place the appropriate standard form in each and every loan file.

For outstanding loans, MBA believes servicers should only be required to provide relevant flood information, as it is currently contained in the loan files, whenever that information is requested.

Second, S. 1405 gives the flood certification a five-year lifetime. Again, for loans outstanding, this is a significant additional servicing burden. MBA believes this requirement should only apply to loans originated after enactment. Lenders can then require borrowers to purchase a certification contract that will be good for the life of the loan.

If indeed it is the intent of S. 1405 that all servicers must maintain the standard form and go back into outstanding loan files to insert this new information and to recertify this information every five years, then MBA strongly believes that an amendment should be added to allow servicers to pass the cost of providing this standard form through to borrowers.

In summary, MBA supports the goals of the National Flood Insurance Program. The objective of ensuring adequate flood insurance where necessary is one that the industry embraces. MBA believes that consumers benefit when servicers assume the burden to determine flood zone coverage. The Federal program, as well as State and local authorities, share in that benefit.

MBA appreciates this opportunity to testify and express our views on S. 1405. We would be pleased to answer any questions or to provide further information for the hearing record.

TESTIMONY OF LARRY W. PALMER

DIRECTOR, FLOOD INSURANCE

REDLAND INSURANCE COMPANY

Mr. Chairman and Distinguished Members of the subcommittee, I am Larry W. Palmer, Director of Flood Insurance for Redland Insurance Company, an Iowa domicile property and casualty company headquartered in Council Bluffs, Iowa. Our primary insurance products are directed towards the heartland. We provide WYO Federal flood insurance primarily in the upper Midwest but with some flood insurance policies issued in the majority of the forty-three States that we are currently admitted to transact the business of insurance.

I am testifying today on behalf of Redland Insurance Company and its participation in the National Flood Insurance Program (NFIP) and in particular our experience this summer with the devastating floods that occurred within the very core of our marketing region. Furthermore, I am also representing the Flood Insurance Servicing Companies Association of America, Inc. (FISCAA) of which I am a charter member, Director and Officer, speaking on behalf of its member companies that collectively have issued over 700,000 (27%) of the current 2.6 million NFIP flood insurance policies issued nationwide, primarily through independent insurance agents.

My personal experience with the NFIP and its "Write Your Own” (WYO) initiative started with its very inception in 1983 and has remained unbroken since that time. I am currently a member of the National WYO Flood Marketing Committee and have served on numerous NFIP/WYO conference panels and committees over the past ten years that have addressed various issues and concerns affecting the NFIP. My focus today is the issue of compliance with the National Flood Insurance Act of 1968 and as amended the Flood Disaster Protection Act of 1973 and their relationship to the pending Senate Bill 1405, cited more precisely as the National Flood Insurance Reform Act of 1993.

I share some of Senator Kerry's concerns expressed in his statement in the August 6, 1993 Congressional Record (S10857 et. seq.). Redland Insurance Company and FISCAA strongly support legislation that will strengthen the NFIP, increase compliance, and provide incentives for community floodplain management and mitigation assistance. I appreciate the point that Senator Kerry makes in his Congressional Record statement by quoting from the Bible about the foolish man who builds his house upon the sand. ." and the relationship to Congress providing subsidized insurance in general and that comparison to the emergency supplemental appropriations of over $5 billion for the flood disaster relief to the upper Midwest in the summer of 1993. However, it seems appropriate for me to correct the record today by pointing out that the majority of folks in the upper Midwest build their homes on soil that supports their main "home place" that in many cases they have resided in for years. The house on average is forty years old (pre-FIRM by NFIP standards) and has a basement or storm cellar, is constructed from wood with clapboard siding and does not afford a breath taking view of any ocean body of water. The house is typical of a home in Valley Junction, Cedar Rapids or Hamburg, Iowa. Of course there are similar homes, but without basements, in the river cities such as Prairie du Chien, Wisconsin, Davenport and Keokuk, Iowa, and the small towns and hamlets in and around the greater St. Louis, Missouri area all located on the Mississippi River. Furthermore, Sioux City, Council Bluffs, and Carter Lake, Iowa, Omaha, Nebraska and Kansas City, Missouri and Kansas all on the Missouri River, plus thousands of small towns and hamlets all along the many small rivers that drain into the "Mighty Mo" and the "Big Muddy." The value of these structures on average is less than $70,000.

There is no mass migration of people to retire or build a second recreational home in any of these areas as above mentioned. In many cases their main "home place" was built before the NFIP even existed. The problem is, however, they were built in the Special Flood Hazard Areas (SFHA) as were later determined by the NFIP. There was not when they were built nor is there now affordable and/or generally available private sector flood insurance for these homeowners! I cannot believe that these families continue to live there because flood insurance is available now from the NFIP. They live there simply because their "home place" is their roots! It is not a whole lot different than why the Bushes of Kennebuckport, Maine and the Kennedy's of Hyannisport, Massachusetts and many other Americans maintain their homes where they do.

I have been following the reform legislation affecting the NFIP since Congressman Bereuter of Nebraska introduced HR 1236 in 1990 and HR 62 in January, 1993, which, I might add, are both very similar in many respects to Senate Bill 1405 particularly with the compliance requirements. I have watched as the bills "gridlocked" while major weather catastrophes have inflicted devastating floods on our country over the past three years and wondered when such an event would strike the Midwest and how soon legislation would be enacted to increase compliance. With reference to compliance, I have attached a graph to my written testimony that I trust you will find self-explanatory relative to policies issued or the lack thereof within the eight States affected by the Midwestern summer floods.

After Hurricane Andrew struck South Florida in August of 1992 I doubt if anybody noticed the increased rainy weather patterns developing over the upper Midwest. The sixteen inch rain within a twenty-four hour period south and west of Des Moines on September 15, 1992 hardly raised a headline beyond the State's boundaries. It was primarily rural flooding! Then the winter of 1992/1993 saw increased snow fall over much of the region in the upper Midwest. It was then that I began to realize the Midwest drought of the past five years was coming to an abrupt end. It was in late February and early March of 1993 that Redland Insurance Company started experiencing its first above normal seasonal flooding events. The early thaw was causing ice jams on the Platte River just to the west of Omaha, Nebraska. Robert and Mary Kriss of rural Gretna, Nebraska lost their home completely when ice jams diverted the main channel of the Platte River and ice chunks flowing in water pounded their home of over twenty years off its foundation and took it and its contents out into the main channel. Many personal belongings that could never be re

placed were lost forever! The Kriss family had flood insurance but others in the surrounding area did not. Unusual circumstances-not really! All these "non-headlines" flooding events happen to the extent that on a nationwide basis over eighty percent of the national catastrophes are flood related. Small towns and hamlets on rivers you have never heard of incur flood damage in the millions of dollars every year. For example, Crawford and Howells, Nebraska in May and June of 1991 experienced significant flooding in their communities. No Presidentially declared disaster to help these folks-just loans because very few people had flood insurance to cover their damage.

My purpose today is to add a new perspective to your thinking about the NFIP and its value to the average citizen in the Midwest as compared to those who build upon the sand. For example, erosion set backs to someone from Hamburg, Iowa may be a term denoting how a farmer terraces the land to maintain moisture in the soil in dry times and prevent soil erosion in wet. What about thirty and sixty year erosion set backs-our Midwestern residents may ask; do rivers erode land faster than the ocean erodes the beach? And what about environmental issues? No, we are not affected by the Florida Keys "mule deer” issue, but we do have concerns about the endangered sand hill cranes, the pallid sturgeon, the burying beetle and even the prairie fringed orchid. But that does not have anything to do with why only one in ten properties located in the Special Flood Hazard Area in the Midwest have NFIP flood insurance.

How does all this balance with increased compliance, incentives for community floodplain management and mitigation assistance as proposed in S. 1405? Simply stated, until the flooding of "biblical proportions" struck the Midwest this summer the average homeowner did not realize that:

1. Their dwelling was in a designated flood hazard area (SFHA) or even that their community was participating in the NFIP;

2. Their standard homeowners policy excluded coverage for losses incurred by the flooding peril; and

3. If they have a mortgage that was effective after 1974 were not aware that flood insurance was required.

Furthermore, my guess is that statistics will confirm many homes in the Midwest have their mortgages paid off and will choose not to purchase flood insurance voluntarily because they do not perceive that the risk exists for their home even after the summer floods or feel the value of coverage as it relates to the average premium of $300 is simply not worth the expense. Many complaints I receive from homeowners in the Midwest relates to the fact that the NFIP flood insurance policy excludes coverage for contents and finished rooms in their basements. Basements are fairly common in the Midwest and many families that cannot afford to trade up to larger homes as their family size and needs warrant simply choose to build that extra bedroom, office and/or recreational room in the basement, complete with wood paneling, carpet, nice furniture and of course the big TV to watch the weekend sports or simply a playroom for the kids. Regardless of how you describe it there is no flood coverage for it! The coverage does not exist because the rates under the NFIP Program have not taken that exposure into consideration for coverage. I appreciate that fact and understand why the NFIP does not provide the coverage, but tell that to the homeowner that equates the real value of flood insurance to the area (the basement) most likely to sustain the greatest damage from flood. I do not have a solution to this issue but would be neglecting my responsibilities here today if I did not bring that concern to your attention! I also understand why the NFIP wants to encourage people in the floodplains to not improve and have contents in the areas most likely to flood in their homes. Worse yet, if you have issued an NFIP flood policy because the lender requires it, but have to deny coverage after the flood waters have filled up the basement. It is true the main items in the basement such as the building foundation elements, furnace, hot water heater, electrical junction boxes, sump pumps, etc. are covered but that does not make Mr. Rush Ridings of Papillion, Nebraska any happier about his flood loss this summer. "Our family room is one of our main living areas," says Mr. Ridings. He had flood insurance, for which I believe he was at least better off than his neighbors who did not, but this coverage void did not help him.

Nevertheless, I still believe the average homeowner that resides in the special flood hazard area is far better off with flood insurance than without. The NFIP has helped hundreds of thousands of Americans rebuild their homes devastated by floods over the years and even as we speak that process is continuing today. So far Redland Insurance Company has in excess of 400 flood claim losses reported since June 1, 1993 and directly related to the summer floods in the Midwest. What that means is that there are many thousands more that do not have flood insurance. It

is still too early to draw any final conclusions, but it is my early guess that the average loss in the Midwest for building coverage will be somewhere between $10,000 and $20,000 and if the homeowner had purchased contents coverage, that loss will be somewhere between $5,000 and $15,000. Approximately half of these claims have been paid and are closed. However the folks that do not have insurance will have to depend on the cumbersome and often time-delayed disaster payment mechanism as their only alternative. The irony of this situation is that just the county of Pinellas, Florida (St. Petersburg area) has more active NFIP flood policies (93,000) than all flood policies currently issued in the entire eight States (82,000) in the upper Midwest that were declared disaster areas this summer by the President. I believe, the taxpayer in general and more importantly that family that has an NFIP flood policy, is much better off with flood insurance regardless of where they reside. Our goal and the wisdom of this committee's final judgment on Senate Bill 1405 will be the test of that. Therefore, on behalf of Redland Insurance Company I support passage of Senate Bill 1405, also known as the National Flood Insurance Reform Act of 1993. Specific points and concerns that I would like you to consider are the following:

Title II-Compliance and Increased Participation:

• Lender compliance, vigorously enforced is vital to the success of the National Flood Insurance Program.

• Escrow for flood insurance premiums, in order to prevent non-renewals of flood policies, is the only way to quantify the renewals and assure compliance and that the premiums are available at the time of renewal. Specific examples related to the summer flooding, was to discover families that were flooded in the West Des Moines/Valley Junction area in 1990 that obtain disaster assistance and were required to get flood insurance as part of their loan but unilaterally chose to not renew their flood policy after the first year. Those same families have once again been flooded in the summer of 1993 and are now seeking additional disaster assistance.

• Include language that will prevent the lending institutions from waiving the requirements for flood insurance on any structure located in the Special Flood Hazard Areas regardless of who the owner is.

• Include language that will provide reasonable notice, at least ten days, to the borrower that flood insurance is required before closing. This will afford the borrower the opportunity to consult with their agent and obtain the necessary information to have a properly completed flood insurance application at least prior to the closing date.

Title III-Ratings and Incentives for Community Floodplain
Management Programs:

Community Rating System (CRS), a must along with public awareness promotions, so that the general public is aware of the flood danger and whether or not they live within harms way". As a result of the Midwestern flooding, it appeared that many homeowners had a false sense of security that their levies would protect them from flood danger and they chose not to get flood insurance. Many levies throughout the upper Midwest did fail and were breached during the massive flooding event that transpired over a four or five week period.

• Do not believe that the full cost of flood zone determinations should be passed on to the borrower. I would like to make note, as part of this testimony, that it was recently announced by the Federal Deposit Insurance Corporation (FDIC) that the Nation's banks had posted their second-highest profit ever during the April/June quarter which amounted to $10.4 billion. That is twice the amount of disaster aid appropriated for the Midwest flooding. The previous quarter also netted a record profit of $10.9 billion. I believe the lending institutions in this country can afford to pay this cost and not further impose additional expense upon the homeowner that will have to comply with this legislation by paying the annual flood insurance premium.

• Support the imposition of Federal penalties on lenders that demonstrated a continued business practice of noncompliance. Believe that the $350 fine is simply not enough to assure serious compliance.

Title IV-Mitigation of Flood and Erosion Risk:

• Agree that mitigation assistance and programs be encouraged and implemented nationwide and that riverine erosion studies be conducted to determine if there is a comparable NFIP fund exposure as compared to the coastal erosion issues.