April 7, 2006

Mortgage banking in California is a multibillion-dollar business. It has thrived with the state's real estate boom and the proliferation of homes built in the low-priced floodplains of the Central Valley.

This industry also is enormously exposed. If and when a major flood occurs, the banking industry will be saddled with waterlogged, worthless homes. As in New Orleans, foreclosures will be rampant. Someone will be left holding a very soggy bag.

You might think that mortgage banks would support - or at least want to discuss - a measure to require flood insurance on vulnerable properties. Instead, the industry is using the same deceptive tactics it employs to sell questionable products (such as zero down payment, interest-only loans) to kill a bill by Assemblyman Dave Jones of Sacramento.

Before Wednesday, Jones' AB 1898 made federal flood insurance a condition of obtaining a mortgage in areas with a one-in-200 chance of flooding in any given year. Jones' bill would have required mortgage lenders to enforce the provision, which made sense because lenders have as much to lose as homeowners.

Unfortunately, the banking industry seems more concerned about short-term profits than long-term survivability. Mortgage bankers worry that an insurance requirement would scare off prospective home buyers. They used some highly deceptive arguments to effectively gut AB 1898.

At the Assembly Insurance Committee, banking and insurance lobbyists made the misleading claim that, because of Hurricane Katrina, the federal flood control program may soon become insolvent. In other words, anyone buying insurance would get nothing after a flood.

It is hard to imagine a more reckless claim. The federal flood insurance program has taken a hit, but it is still paying insured victims of Katrina and other hurricanes. Are banking executives suggesting that Sacramento homeowners should not buy any federal flood insurance or abandon their current voluntary policies? Is that the industry's position?

The other false claim is that an insurance program would do nothing to reduce the state's liability during a flood. As Jones rightly pointed out, flood insurance would help pay for any damages that property owners incurred following a levee break. As a result, they would have less standing to seek state reimbursement for total damages, which could reach several billion dollars.

The lobbying worked. The committee, at the prompting of Ron Calderon, D-Montebello, forced Jones to amend his bill. Gone is the provision that mortgage bankers would require flood insurance for specified loan applicants. That means Jones will have to figure out an enforcement provision before AB 1898 goes to Calderon's Banking and Finance Committee.

While Assembly Speaker Fabian Núñez deserves credit for working to keep the bill alive, this was a sad day for both Democrats and Republicans. GOP lawmakers, as expected, voted in lock step against AB 1898, even in its weakened state. No Democrat on the committee stood up for the original bill or opposed weakening it. Also absent was Insurance Commissioner John Garamendi, who (even before his recent surgery) has been noticeably silent on Jones' bill.

The insurance mandate is just one of many farsighted flood control measures that Jones, Assemblywoman Lois Wolk and others have introduced this session. More spending on levees is part of the answer. But Wolk and Jones recognize that levees alone won't protect communities from the biggest flood. Moreover, they will do nothing to help recovery.

There is one silver lining in the brazen gutting of this bill: We now have a clear illustration of why it is so hard to improve flood control in California. Despite what the majority of residents want, a handful of greedy and self-absorbed special interest groups have veto power over any proposal. Mortgage bankers have now revealed themselves as enemies of common-sense flood mitigation. Before this session is over, it is unlikely they will be standing alone.

How they voted ...

...on a weakened AB 1898

Yes

Ron Calderon, D-Montibello
Dario Frommer, D-Los Angeles
Betty Karnette, D-Long Beach
Sally Lieber, D-Santa Clara
Pedro Nava, D-Santa Barbara
Tom Umberg, D-Santa Ana

No

John Benoit, R-Riverside (vice chair)
Russ Bogh, R-Beaumont
Dennis Mountjoy, R-Monrovia

Abstained

Juan Vargas, D-San Diego (chair)