When a property suffers damage of any kind, either major or minor, there is a potential impact on its value. If a repair is not completed, the market value of the property is significantly diminished.
That scenario will affect the property owner’s sense of financial stability and net worth, apart from the emotional and physical sense of loss. Still, any party with a financial position or interest in the property, such as a lender, will also be concerned.
When a claim occurs with a large loss impact, the lender or any other party with a financial position should be notified immediately out of courtesy, and it’s also the professional act to follow. This doesn’t suggest that the lender will take all the money, close the mortgage, etc., which would jeopardize the repair or rebuild process, but it will trigger a prudent review.
The lender will want to know what the plan is at every stage, whether that entails new design blueprints, repairs, timelines for construction, but especially the flow of funds from the insurer to the policyholder and contractor.
Early on, the lender will review the mortgage’s status and if the mortgagee is in “good standing” with the payments and credit position. In some cases, where the policyholder was previously in “bad standing” and defaulted with the lender, the mortgagor could pull the insurance funds in and pay out the existing principal.
This act leaves the policyholder with the challenge of repairing or rebuilding with insufficient funds and finding a new lender. Likely their credit is less than desirable, so their issues compound consequently. In this case, the repair or rebuild doesn’t actually get completed; demolition of the structure is performed, followed by the vacant lot’s listing for sale. If demolition can’t be paid for, a for sale sign is placed on the property and sold as-is.
If the mortgagee is in “good standing”, typically the lender will leave the mortgage in place and request the monthly payments continue as per the terms. The lender will then ask the insurance policy payments to be sent directly from the insurer via adjuster admin.
The lender will exercise and feel more comfortable with the entire process when they are the ones to release the funds to the contractor and policyholder. An appraiser, secured by the lender, will typically perform site visits to validate completion stages. Although time delays can result from this additional shuffle of funds and accountability, it does work well and keeps all parties satisfied.
The contractor involved should issue copies of the blueprints and perhaps building permits to the lender for ongoing awareness and inclusion. It must be understood that the lender is primarily exposed to an undervalued property compared to the mortgage that is often registered against it.
Courtesy and cooperation are required, so a successful outcome is achieved for all parties. Early email address exchange is the most effective communication method and can continue to complete the repair or rebuild.
If an existing mortgage gets closed out following the claim date, and the policyholders secure a new mortgage, it is strongly recommended that the contractor commences no work. All approvals and documents need to be in place before repair or rebuild efforts and expenses start. A last-minute “glitch” in the new financing process could leave the contractor without payment and the policyholder with a lien against the property, much worse, an unfinished project.
In summary, there are multiple sectors of interest and concern beyond just that of the policyholder or property owner. An ongoing big picture view of all parties impacted and involved leads to an optimal resolution of the claim. The lender or mortgagor is one that I explicitly discussed here.
With our dedication to servicing large property loss rebuilds for the insurance industry, we understand the many logistics that come with these unique projects, such as the role of lenders. To learn more or to connect with your local Rebuild Response® builder, contact us.