The 4 Most Important Things to Tell Reverse Borrowers about Hazard Insurance
By Jared Skrabala, Servicing Oversight and Asset Management at RMI
Once a reverse mortgage is closed, the next step is servicing the loan by the HECM Issuer, a portfolio manager, or a subservicer who specializes in it. While servicing oversight can help maximize the value of loans and minimize potential losses, it’s essential to properly educate borrowers at the time of origination. One key issue to focus on is Hazard Insurance and Loss Drafts
How to Explain Hazard Insurance and Loss Drafts Better from From the Very Beginning
Loan Originators play an essential role when it comes to successfully navigating Hazard Insurance and Loss Drafts. Right at closing, originators should educate borrowers about their responsibility to maintain hazard insurance, the correct process for handling claims and repairs, and the importance of ongoing communication when damage occurs. Proactive communication and coordination between the borrower, servicer, and insurance provider is key to managing hazard insurance effectively when a reverse mortgage is involved.
Exactly what should be shared at closing about Hazard Insurance and Loss Drafts:
The Borrower’s Responsibility
The Servicer’s Role
The Pros and Cons of Lender-placed Policies
How to File a Claim
The Borrower’s Responsibility is Clear
Reverse mortgage borrowers are always responsible for maintaining adequate hazard insurance coverage on the property throughout the life of the loan. This of course includes paying the insurance premiums in a timely manner.
In the event of damage to the property, the borrower is then responsible for notifying the insurance provider, contacting the loan servicer, and ultimately arranging for the repairs to be successfully completed.
The Servicer’s Role is Critical
Reverse mortgage servicers closely monitor the borrower's hazard insurance coverage throughout the life of the loan to make sure it is adequately sized and premium payments are current.
When a claim is made and approved by the insurance provider, servicers oversee disbursement of loss draft funds as repairs are successfully completed and certified.
The Pros and Cons of Lender-placed Policies
A lender-placed policy ensures that a property is always adequately covered if the borrower allows their own hazard insurance to lapse. The servicer will force-place this insurance coverage on the property to protect their own interest in the property.
Borrowers must understand ahead of time that a lender-placed policy only covers the structure and doesn't cover their personal items like their own policy did. Also, lender-placed insurance is typically more expensive than the borrower's preferred policy.
The Most Important Aspect of Hazard Insurance is How to Correctly File a Claim
If their property sustains damage, borrowers must file a claim with their insurance provider and work with the servicer to ensure repairs are completed properly. The servicer will monitor the repair work and disburse insurance claim funds in controlled loss drafts. You should clearly explain each step in that process:
Step 1: Contact the insurance provider
Homeowners should take pictures and document what has occurred so they have clear evidence ready for their insurer when they file their claim.
Borrowers should usually obtain estimates from three qualified contractors for the repairs to assure that their claimed amount is reasonable and will be more easily approved by the insurance company.
Step 2: Contact the loan servicer
Homeowners should then call their loan servicer to let them know about the damage. The servicer will help them through the process from that point forward by making sure the repairs are being completed appropriately and the funds are being dispersed.
Loss Drafts from hazard insurance to repair damage are handled similarly to first-year repairs that were paid from the Repair Set Aside. HUD’s inspection requirements are the same too. All damage repairs need to be certified by an FHA-approved inspector before the servicer can issue Loss Draft funds. Once approved the servicer can typically release the funds in thirds.
Step 3: Move swiftly
Delaying repair completion can lead to more property damage that won’t be covered by the hazard insurance company because it was not part of the original claim. For example, if an initial claim was approved to repair a damaged roof but delays allowed rain water to damage the interior of the house, the new damages would have to be paid out of pocket by the borrower.
What if Properties Are in a Presidentially-Declared Major Disaster Area (PDMDA)?
Borrowers whose homes sustain property damage caused by a disaster located in a PDMDA may qualify for disaster relief through the Federal Emergency Management Agency (FEMA). These borrowers should first file a claim with their insurance carrier and contact their loan servicer before applying for Disaster Assistance on FEMA’s website.
With FEMA Disaster Relief:
An inspection may be required to determine if the homeowner qualifies for assistance and how much assistance the homeowner will receive
FEMA Disaster Assistance will not assist with losses covered under an insurance policy and typically will not cover all losses sustained to the homeowner
Assistance is paid to homeowners in the form of a grant and is not generally required to be paid back
Transitional sheltering may be available for homeowners who have applied and been approved for disaster assistance
Learn How To Minimize Losses In Any Reverse Servicing Portfolio
Upfront education about Hazard Insurance and Loss Drafts is just one step to effective loan servicing. Portfolio Managers and HECM Issuers holding financial interest are often unaware of how operational inefficiencies can inflate loss severities within their servicing portfolios. RMI’s seasoned servicing experts specialized in reverse can provide insights to transform performance, and our cutting-edge software is equipped with business rules designed to appropriately manage these assets. Contact us to learn about Servicing Oversight with Reverse Market Insight.