| Hurricane Katrina Mortgage Industry Comments on MS EA 6-16-061 Homeowner Grants |
| Friday, 23 June 2006 | |
|
The following is the official letter to the Mississippi Development Authority (MDA) regarding industry concerns with the Mississippi’s Katrina Recovery Homeowner Grant Assistance Program. June 16, 2006 RE: Comments on Environmental Assessment for Mississippi’s Katrina Recovery Homeowner Grant Assistance Program Dear Mr. Reed: The undersigned organizations would like to take this opportunity to comment on the Mississippi Development Authority’s (the "MDA") Environmental Assessment (the "EA") and Notice to the Public regarding Mississippi’s Katrina Recovery Homeowner Grant Assistance Program (the "Program"). Overview Our combined membership originates and services virtually every mortgage in the State of Mississippi. Since Hurricane Katrina last August, lenders have, among other things:
The emotional and physical losses suffered by the citizens of Mississippi are unique, unprecedented, and difficult to fathom. The financial losses incurred by homeowners whose properties were damaged or destroyed by Katrina mirror the financial losses that our lenders have sustained to date, and will sustain in the future. For example, many homeowners are currently unable to pay their mortgage when they have also lost their jobs, or are reluctant to pay as they determine what their long-term plans are. None are eager to pay on property to which they may not return. While they work out their plans, our members have to continue to make principal and interest payments to our investors who actually hold many of the mortgages. This is because mortgage banks generally originate loans and then sell the mortgage to an investor, keeping a small fee from the investor for the servicing of the loan. Just because a borrower is not paying us does not mean we can stop paying our investors. When one or a few borrowers default, lenders can absorb the loss and liquidity in the market will not be affected. When thousands of borrowers default, the impact on liquidity is felt, and funds are less available from the lenders who have suffered the default. In this case, that includes most of the major national lenders. This is one major reason why we support homeowners receiving funds; but it is not the only reason. The sooner borrowers receive funds, the faster they can restore their properties and put their lives back on track. This will mean that communities are coming back, which is in everyone’s interest. However, if grant funds are not used to repair, rebuild or to pay back the debt, grant recipients are enriched to the detriment of the communities, which have a reasonable expectation that the public funds will be used for this purpose. We therefore support and endorse Mississippi’s efforts to help its citizens face the enormous expenses that this disaster has caused and to do so quickly, but continue to be concerned that a significant portion of the funds will not be used to repair, rebuild or relocate or to repay loans on properties that the homeowner cannot repair or replace. As explained below, the Program as currently configured (a) is not likely to achieve the desired results; (b) is likely to result in the dispensing of money that is inconsistent with the congressional authorization and intent; and (c) violates the environmental review obligations that apply to a ‘direct’ grant program. There are effective ways to achieve the state’s goals of assuring the expeditious delivery of benefits while still preserving appropriate controls to prevent fraud or misuse of funds, and assuring that Congress’ intent that applicable environmental review obligations be met. I. The EA for the Direct and Unrestricted Compensation Program Violates Applicable Law and Regulation Throughout the EA, the MDA concludes that because grant funds will be provided as direct compensation to the homeowner who has complete discretion to determine what he will do with that money, all matters of compliance with the National Environmental Policy Act ("NEPA") and "burdensome" monitoring obligations under the CDBG program are avoided. We believe these conclusions are inconsistent with statutory mandates and existing regulations. The industry’s position and legal analysis that supports this concern has been made available to the MDA and United States Department of Housing and Urban Development (HUD) staff. No changes were made to the Program as a result of that communication nor does the EA address the concerns that were raised by over 250 commenters. (Attachment B to EA). Congress specifically required that the Program meet the environmental review requirements of the HUD’s regulations: That in administering the funds under this heading, the Secretary of Housing and Urban Development may waive, or specify alternative requirements for, any provision of any statute or regulation that the Secretary administers in connection with the obligation by the Secretary or the use by the recipient of these funds or guarantees (except for requirements related to fair housing, nondiscrimination, labor standards, and the environment). HUD regulations "provide instructions and guidance to recipients of HUD assistance and other responsible entities for conducting an environmental review for a particular project or activity and for obtaining approval of a Request for Release of Funds." Among the programs governed by Part 58 are Community Development Block Grant programs. The HUD regulations discuss three types of environmental reviews that may be needed for this program: (a) reviews required for "major federal actions significantly affecting the environment" required under ("NEPA review"); (b) reviews under other environmental laws and related laws that may be triggered by legislation, regulation or executive order ("58.5 review"); and (c) reviews relating to additional federal laws ("58.6 review"). The EA that has been presented for comment meets the requirements for 58.6 review, but fails to meet the requirements for 58.5 review or for NEPA review. We respectfully submit that the EA contains conflicting, unsupported and unexplained assertions that purport to support its apparent conclusions that no NEPA review is required, and that it has fulfilled its obligations to conduct 58.5 review. As explained below, the EA:
A. NEPA review NEPA requires that every federal agency evaluate the potential environmental impacts of "major federal actions significantly affecting the quality of the human environment." As noted above, HUD regulations specifically require that the Program is subject to NEPA review as provided for in those regulations. The regulations contain a number of NEPA exclusions for some CBDG programs, 24 C.F.R. §58.35, including programs for the rebuilding of homes. But none of those exclusions apply to direct payment programs that Mississippi has proposed. Therefore NEPA must be followed. Even though there are no NEPA exclusions for this program, and even though Congress specifically mandated that NEPA review occur, the EA does not follow the NEPA review process outlined in the HUD regulations. It justifies avoiding these obligations by stating: As the foregoing analysis indicates and illustrates, it is important to recognize that the disbursement of funds through the proposed grant program does not have any identifiable direct environmental impact because grant recipients have full discretion as to how and where the grant money should be spent. It is unclear whether the EA is concluding that the direct grant program is completely exempt for NEPA review or that it is subject to and has fulfilled all NEPA review requirements. If the basis for the EA analysis is that the grant program provides so much discretion that Mississippi can’t possibly anticipate how the money might be used, such a conclusion is repeatedly contradicted by the assumption made throughout the EA that most recipients are likely to use the money to repair or replace their existing homes:
The foregoing demonstrates that there is substantial certainty what most of this money is supposed to be used for, and where it is supposed to be used. The EA fails to explain why, notwithstanding this certainty, it cannot even begin to conduct a NEPA analysis as called for in the HUD regulations. Mississippi has the legal obligation to explain the basis for its decision in this regard. If, on the other hand the EA is concluding that it can and did conduct a NEPA analysis of this program, it is wrong. As noted above, its conclusions regarding the environmental impact of the proposed action are conclusory and contradictory. See notes 9 though 12 above and the accompanying text. It is incumbent on an agency to provide the reasoning and basis for its conclusions regarding potential environmental impact , not just conclusory self-serving statements, devoid of analysis. B. Section 58. 5 Review (other environmental laws) Under HUD regulations, Mississippi is obligated to evaluate the Program under a variety of environmental laws, independent of NEPA unless certain exemptions apply. See generally 24.C.F.R. §58.5. The EA lists these laws but provides little or no analysis of their application. Of the 11 laws, regulations or other policies considered:
In addition, all of the 7 other environmental factors that the EA described as "NEPA driven," are dismissed from consideration based on the unlimited, discretionary nature of the payments being made. C. Monitoring Obligations The EA assumes for purposes of the environmental analysis that there are so few restrictions on the use of these funds that it cannot evaluate the environmental impacts of those uses. This appears to be inconsistent with the Appropriations Act, and the position taken by HUD that the state has an obligation to monitor both the award and the use of the funds. Both obligations are premised on the existence of some limits on the use of these funds. The EA does not explain why it is has no way of knowing how this money will be spent for purposes of an environmental review, but does have a way of auditing expenditures to make sure it is spent for permissible purposes. Congress specifically authorized this money only for necessary expenses related to disaster relief, long-term recovery, and restoration of infrastructure. Notwithstanding these limits, the EA states: The purpose and need for this proposal can be
stated simply as follows: to provide financial relief to the
approximately 30,000 homeowners in Mississippi whose residences
were damaged or destroyed by flooding associated with Hurricane
Katrina and who lack adequate insurance coverage to compensate for
their massive financial losses. Such relief must be provided in a
streamlined, flexible, and speedy manner that is both individually
efficient yet systematically economical. MDA's proposed program is purely a compensation program that is not tied to any specific site locations or properties and is only intended to provide funding for past financial losses. Paying expenses relating to long term recovery is far different than compensating someone for financial losses. The EA does not address this difference and instead assumes, without any explanation that providing expenses for long term recovery is the same as paying compensation for past losses, even where that compensation is not required to be used for long term recovery. In order to ensure that the funds are used for these purposes, the Appropriations Act mandates that:
The Notice goes into considerable detail on how it will monitor and audit grantee management of the grants and uses of the funds. The MDA explains in the EA that the direct compensation approach is more desirable because it eliminates the cost and burden of complying with reporting obligations under the CDBG program. More specifically, the MDA contends that if specific use restrictions or escrows were imposed, MDA or HUD would have to monitor whether homeowners were using the money for those specified purposes and the cost of such compliance would cut into the CDBG funds. By not putting any obligations on homeowners, the agencies believe they can avoid this monitoring requirement. While we are not offering comments on whether CDBG monitoring can be avoided in this manner, it is clear that statutory reporting obligations under the Department of Defense Appropriations Act (the "Appropriations Act" that created the Program cannot be waived. As recently as June 14, 2006, the GAO testified before Congress regarding the potential for and reality of fraud in these kinds of assistance programs. This underscores the importance of monitoring this program to ensure not only that persons receive money for actual losses, but that the moneys are spent for the purposes Congress authorized. The EA fails to explain how it can conclude that the direct grant program is so vague and limitless that the state cannot begin to evaluate the environmental impact of those expenditures, while at the same time there are sufficient controls and limits in place to ensure that the money is spent as mandated by Congress. The EA does not explain how Mississippi will report to Congress on the "uses" of funds when it has no control over how the borrower uses the funds. While the MDA may favor a direct-grant disbursement method because of a perceived low administrative burden and quicker pay out, such perception -- given Congress's express limitations on the use of the funds and HUD's compliance and reporting requirements -- is illusory at best. The Program must be capable of ensuring that the money is in fact used for the purposes authorized by Congress. We share the MDA’s concern that funds be made available to grantees as soon as possible, but also believe that it is equally important that the program be structured correctly. II. The "Escrow Approach" is a Viable and Appropriate Alternative The EA concludes that "under the escrow approach there would be a definite environmental impact if homeowners were required by the mortgage company to repair or rebuilding [sic] on a specific site." The MDA further concludes: "the impacts to the specific site would require site specific assessments thereby increasing the delivery cost to the homeowner who are already facing difficult financial situations and would cause further delay in the reconstruction of the affected area." These conclusions are inaccurate and inconsistent with applicable law. The MDA overstates the compliance burden of the "escrow approach" and fails to fully describe available exclusions to NEPA and 58.5 laws that would eliminate or substantially reduce the compliance obligations. Finally, the MDA fails to describe or evaluate "the Miscellaneous Proceeds or Conditioned Subordination," alternatives that create use requirements through operation of "private action" under the mortgage/deed of trust. We would like to address each on of these issues in turn. A. Environmental Review Obligations for an Escrow Program are Less Onerous than Those for a Direct Payment Program First, CDBG funds used to rehabilitate or renovate property damaged by Hurricane Katrina, and funds used to relocate, are exempt or excluded from HUD's regulations governing environmental review of CDBG grants, and therefore would be exempt from review under NEPA and other laws. This fact is not addressed at all in the EA, although it was explained in comments submitted before the EA was completed. Second, the MDA states that a key reason for rejecting an escrow approach is because escrows would trigger site specific environmental review requirements. This is incorrect. Subsection 58.32 of Title 24 of the Code of Federal Regulations provides that responsible entities receiving CDBG funds "must group together and evaluate as a single project all individual activities which are related either on a geographical or functional basis, or are logical parts of a composite of contemplated actions." Among the listed purposes of project aggregation is to "group together related activities so that a responsible entity can ... address adequately and analyze, in a single environmental review, the separate and combined impacts of [similar or related] activities." HUD regulations require that any environmental review be based on project aggregation. Were Mississippi to use an escrow type program, it could easily conclude that all of the sites occurred in a common geographic area, all were caused by the same events, and the entire program focuses on one overall project: addressing the serious housing needs of those whose homes were damaged or destroyed by Hurricane Katrina. On that basis alone it could aggregate all properties for purpose of its review. The MDA does not explain why such site assessments would be necessary given previous blanket approvals and broad exemption authority. The fact that other "site specific" concerns, such as elevation, flood insurance and rebuilding standards, are handled through a covenant running with the land, any other property specific issue (such as land use) could be handled in this same manner. Lastly, the MDA states that the paramount reason for not adopting the "escrow approach" was to avoid "overly-paternalistic oversight to a program focused on providing funding to needy Mississippi homeowners as quickly and efficiently as possible." If speed and cost were truly a factor, the MDA would not have conditioned grant funds on the covenants, which add tens of thousands of dollars to the cost of repair and substantial delays in the building process. Moreover, if there was ever a time to "look out for the consumer," now is that time. With unrestricted funds fraud is inevitable. On June 14, 2006, the GAO submitted testimony to Congress illustrating how unrestricted payments of money have resulted in the loss of millions, if not billions of dollars. In addition, even for consumers who want to use the money to rebuild, unrestricted payments allow them to become the targets of fraud by others. Given the shortage of building contractors, individual consumers will be powerless against the demands of building contractors. Again, GAO illustrated this in a recent report to Congress. Lenders’ standard insurance process applied to grant funds, however, would offer desired controls. Lenders have a long and reputable history of instituting flexible disbursement procedures to ensure sufficient funds are given up front to homeowners to make initial payments to contractors, purchase material, perform demolition and begin major repairs or reconstruction. The EA fails to address or attempt to balance MDA’s concerns about avoiding a paternalistic oversight program with the very real legal and financial interest in the real estate. Conversely, the escrow approach would facilitate compliance with this obligation by making any information gathering system easier to administer on account of the involvement of lenders in the process. Inherent in the escrow system are processes by which lenders monitor and approve uses of funds. Indeed, an escrow approach (under which lenders administer repair and reconstruction escrows) would not add to the state's burden; rather, the state would benefit from lenders' experience in administering such funds, as they routinely perform similar functions in the administration of insurance proceeds, and in the recordkeeping systems that are inherent in the lenders’ escrow procedures. Conclusion The State of Mississippi can adopt a program that is consistent with the statutory appropriation, results in substantial rebuilding of homes damaged by the hurricanes, ensures that homeowners are able to pay off their mortgages and have a home to live in, and that contains an effective and inexpensive means of rooting out fraud which is carried out by lenders, not paid for with taxpayers dollars. We urge the state to reconsider its current program. Sincerely, Mortgage Bankers Association To view the letter please click on the following. |
