The point here is that government -- be it local, state, or federal -- will ultimately be on the hook here for all the people who default on their loans.
There's simply no way around that. So now, what do we do?
I suggest to you that for those whose property is covered by federally guaranteed flood insurance, rebuilding on the flood plain is insane. But, they have the moral and legal right to everything that the law provides.
Which is why I say, "pay them now, or pay them later."