Program for homes damaged by Ike under review

August 16, 2011 11:26:25 AM PDT
Disagreements among homeowners in an exclusive Galveston Island beach community have led to a fraud investigation involving a $25 million federal buyout program for houses damaged by Hurricane Ike in 2008.

The state-run program is administered by Galveston and funded by the Federal Emergency Management Agency's hazard mitigation grant program, which was designed to buy homes subject to repeated flooding to prevent future losses.

The Houston Chronicle reported Tuesday that several homeowners in the tiny Sands of Kahala Beach subdivision have made accusations of fraud, charging that the entire program is flawed. They said one homeowner, Carol Severance, continues to collect rent on a house rated as "substantially damaged" under the buyout program. Substantially damaged means the cost of repair is at least 50 percent of the market value.

Severance has sold three of her four beach properties through the buyout program. She will get $812,000 for her house in the Sands of Kahala Beach community, but only if her homeowners association approves the sale. Until then, she is renting the house for $5,428 per week during the peak season.

Severance accused the homeowners opposing the buyout of creating conspiracy theories.

"There is a lot of frothing at the mouth by ignorant people," she said. "They have no idea what they are talking about. They are just mad."

But Dan Kellogg, a former homeowners association president, called the FEMA program "extremely flawed."

For example, the purchase price of Severance's final property will be based on the 2008 fair market value of $1 million, but the estimate of the house's fair market value used to calculate the damage category was $366,000.

The disparity made it easy for expensive homes to qualify even though they remained habitable, Kellogg said.

Kevin Stohlman of Bay Reef Realty, which handles Severance's rental property, said he sent an e-mail to the city expressing concern about renting a property listed as substantially damaged. But he said city officials assured him the house was habitable.

Greg Pekar, mitigation administrator for the state Department of Emergency Management, which oversees the program and is doing the investigation, said the program is intended for river bank property and rarely used to purchase beach properties.

The probe is examining all 68 buyouts related to Ike, including six properties that have been approved but not yet purchased. Five of the six are in Sands of Kahala Beach.

The state forced Galveston to return $3 million it had been given for the six remaining buyouts, pending completion of the investigation.

Pekar said the city will get the money back if investigators find no improprieties.

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