If your home has been seriously damaged or destroyed, your
insurance company will release a check made out to both you and
your
mortgage lender
to pay for the necessary repairs.
"Lenders have a substantial investment in the property,
sometimes more than the homeowner, especially if the homeowner has
made a small down payment," says Michael Barry, vice president of
media relations for the Insurance Information Institute in New York
City. Mortgage lenders have an equal right to the insurance check
to ensure repairs are made, says Barry.
Yet, while Michael Northagen, vice president with Wells Fargo
Home Mortgage in Minneapolis, Minn., agrees, saying "the desire of
the [mortgage] lender is always to have repairs made to a
property," a consumer advocacy group has come out and said
otherwise.
A small number of homeowners who lost their homes last year to
the
wildfires in Bastrop, Texas
, reported that their mortgage lenders made them pay down or pay
off their mortgage balance with insurance money, instead of
applying the funds towards rebuilding.
Insurance money used to pay down mortgages
According to United Policyholders, a consumer advocacy group for
insurance
customers based in San Francisco, approximately one-third of the
homeowners who responded to the group's post-disaster survey said
their lender wanted some or all of their insurance money to be used
to reduce their mortgage balance before releasing funds for
rebuilding.
"We're continuing to monitor these complaints and are working
with the Texas Attorney General's investigation," says Amy Bach,
executive director of United Policyholders. "Three homeowners gave
us additional information and all three said they were up-to-date
on their mortgage payments."
Bach says one of the homeowners received the remaining balance
of the insurance proceeds after her loan balance was paid down, but
the other two had their entire insurance check applied to their
mortgage. The homes of all three were completely destroyed.
By all accounts, what has been reported in Texas isn't a common
occurrence. Both Northagen and Barry say it would be extremely
unusual for a lender to require
homeowners
to pay down their loan balance with insurance funds before they
could make needed repairs, since it is in the lender's best
interest to have the property restored. Northagen says this might
only occur only if a borrower is seriously delinquent or in
foreclosure. Neither Northagen nor Barry has ever heard of this
happening to borrowers who are current on their mortgage.
Mortgage lenders and insurance claims
Northagen says that if homeowners haven't contacted their
mortgage lender or servicer shortly after their home was damaged,
receipt of a check made out to both lender and homeowner should
trigger you to act.
"If the insurance claim is less than $15,000 and the loan is
current, the servicer will usually endorse the check and release
the funds to the homeowner with minimal documentation such as a
photo ID and a copy of the insurance adjuster's worksheet," says
Northagen. "About 60 percent of the time, this is how claims are
handled."
However, Northagen says the other 40 percent are larger than
$15,000 and require monitoring by the mortgage lender.
"Typically, for a larger claim, the lender becomes more
intimately involved with the repair process," he says. "The lender
would need to see the contractor's estimate and a W-9 document for
reporting purposes. Under these circumstances the lender would put
the insurance funds in escrow after getting the borrower's
endorsement and then would release the funds in three
installments."
On a $30,000 claim, for example, the first $10,000 would be
given to the homeowner to pay the contractor when the claim is
first documented, according to Northagen. The lender then pays for
an inspection when the work is approximately 50 percent complete
and then releases the second installment. The final payment is made
after another inspection ensuring that the repair is complete.
Delinquency changes everything
Northagen says that borrowers who are current on their payments
should experience the same process regardless of whether their
property was entirely destroyed or not. Even borrowers who are in
default normally will have their insurance claim handled the same
way as long as they are working with the lender on a repayment
plan.
"If the borrower [in default] is still living in the home and is
making progress toward repayment and the investor is OK with it, we
will release the insurance benefits so repairs can begin," says
Northagen.
"If the borrower is severely delinquent, we handle the situation
on a case-by-case basis. We try to work with our customers, but
ultimately, if the borrower is not cooperating and not returning
messages or is no longer living in the home, the servicer may ask
to have the insurance proceeds applied to the loan balance.
However, this happens in a relatively small number of cases."
Getting help
Barry says that homeowners who are having trouble accessing
insurance funds should go directly to their mortgage lender rather
than to their insurance company.
"When you have a loss, it's always a good idea to notify your
lender so that it's not a surprise," he says. "It's better if you
tell them what happened rather than them hearing it from the
insurance company."
(Note: Investigations are still ongoing into why certain
Texas homeowners had their insurance money applied to their
mortgage balance instead of towards rebuilding. We'll be sure to
update this story when we learn more.)