Monday, May 30, 2011

Potential Housing Insurance Fallout from Tornado

Post and photo by the Hawthorne Hawkman.

Shortly after the tornado hit NoMi, Alex Stenback of the Behind the Mortgage blog posted this article about how insurance premiums are allocated.  It's no secret to northsiders or pretty much anyone else in Minneapolis that the storm damage was compounded by having gone through an area ravaged by foreclosures and vacancies.  The Minneapolis/St. Paul Business Journal stated that over 200 vacant or foreclosed properties were affected by the storm to some degree.

One glaring problem with damaged foreclosed properties is figuring out who owns them in the first place?  Securitized home loans were split up on the secondary market with various entities owning parts of each mortgage.  And often those entities aren't even easily traced.  The Mortgage Electronic Recording System, or MERS, is a storage point of sorts for securitized mortgages.  Essentially MERS facilitates multiple, frequent transfers of mortgages by having their name listed on state and county records as the owner - even though they only store the data of who really does own an interest in a property.  So if a foreclosed property needs repair or demolition, how do we hold such "owners" accountable?

Putting a more human face on this, however...

...is the question of what happens to a homeowner who is a few thousand dollars delinquent as he or she faces the prospect of foreclosure.  I'm going to be Pollyannish here and just assume that every single such person in NoMi kept their insurance premiums up to date.  We know, however, that is likely not the case.  If taxes and insurance aren't escrowed, delinquent borrowers often fall behind on those payments as well.

As taken from the post linked above, most standard Minnesota mortgages contain the following clause:

“If the Property is damaged by fire or other casualty, Borrower must promptly give notice of such damage to Lender and the insurance company. In such event, the insurance proceeds paid on account of such damage will be applied to payment of the amounts owed by Borrower pursuant to the Note, even if such amounts are not otherwise then due, unless Borrower is permitted to make an election….”

And then there's this:

"…if…Borrower is not in default under this Mortgage (or after Borrower has cured any such default) … and…such damage does not exceed ten percent (10%) of the then assessed market value of the Improvements, then Borrower may elect to have that portion of such insurance proceeds necessary to repair, replace, or restore the damaged Property (the “Repairs”) deposited in escrow with a bank or title insurance company qualified to do business in Minnesota, or such other party as may be mutually agreeable to Lender and Borrower."

Even assuming we know who the lender is, that lender has the option of applying insurance proceeds to the past due amount on the mortgage.  While a comment in the referenced blog hasn't been validated, one person claims that insurance policies may not apply if the property has been vacant for a certain period of time - unless the owner specifically extends the coverage.

What are the odds of all of these things converging in such a way that the damage to our housing stock is sufficiently repaired through private insurance alone?  About the same as the odds of successfully navigating an asteroid field, or specifically 3,720 to one.  (You didn't think we'd get out of a mortgage geeky post WITHOUT a Star Wars reference, did you?)

This is why federal and state aid are going to be crucial to rebuilding north Minneapolis.

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