Credit woes could increase Fla. mortgage defaults

Mar 6, 2009

Miami Herald--March 5, 2009

Associated Press Writer

TALLAHASSEE, Fla. — The national credit crunch could threaten the viability of Florida’s hurricane insurance backup fund and that could lead to more home foreclosures, the state’s insurance commissioner told a Senate committee Thursday.

The panel’s chairman said one alternative would be to raise premiums for homeowner and other property coverage.

The problem lies with the Florida Hurricane Catastrophe Fund, commonly called the “cat fund.” It is having a hard time lining up financing, Insurance Commissioner Kevin McCarty told the Senate Ways & Means Committee on Thursday.

Many insurance companies so heavily depend on the fund that they might be downgraded to the point home mortgages, which require borrowers to buy adequate property insurance, could go into default, McCarty said.

“The potential downgrading of our companies could lead to cataclysmic events,” he said.

If the fund runs out of money, the plan is to sell tax-free municipal bonds to cover remaining claims. It’s unlikely, though, the fund could sell enough bonds if a major hurricane should strike this year because the bond market has “cratered,” McCarty said.

The state is exploring other options including a line of credit from the federal government.

Committee Chairman JD Alexander, R-Lake Wales, said insurance premiums may need to go up to make sure companies are solvent enough to pay claims.

“The reality is we went through the last hurricane season with the situation where our cat fund was probably insolvent,” Alexander said.

Florida, though, got lucky and was not struck by a major hurricane in 2008. The cat fund has about $14 billion on hand to pay claims, but it likely would need more than that to cover a major hurricane. The fund sold bonds to cover claims from a series of hurricanes in 2004-05. They are being repaid through a nine-year, 1 percent assessment on insurance policies for nearly all types of coverage including automobile.

“Quite frankly, I’m going to lead the pitchfork and torch brigade if they don’t fix folks’ homes after the storm,” Alexander said.

Alexander and Sen. Al Lawson, D-Tallahassee, urged McCarty to change course and keep State Farm Florida, the state’s largest private homeowner insurer, from withdrawing from Florida.

The company, a subsidiary of Illinois-based State Farm, obtained permission from McCarty, with some strings attached, to withdraw after he turned down a 47.1 percent rate increase.

McCarty said the company, though, has agreed to stay through the end of the 2009 hurricane season.

The State Board of Administration, chaired by Gov. Charlie Crist, next week is scheduled to decide on a marketing approach for financing the cat fund from private sources.

Crist also has met with federal officials on the idea of a line of credit. A long-range solution would be a national cat fund.

“The level of hurricane risk is beyond the financial capacities of Florida alone,” Alexander said. “We need the federal government to help us.”