Earlier today we published a contributed piece from an attorney on the front lines of the foreclosure mess — and he wrote about a Tennessee Supreme Court case pitting an insurer against a lender. The reason?
The insured property went into foreclosure, and then burned to the ground. When the lender went back to the insurer for restitution, the insurer balked and said the lender had a duty to disclose the foreclosure to it.
We here at HW think it’s likely to end up being a much more common problem. Arson has always been an issue when we’re talking about foreclosures. Here’s an example of the lengths some borrowers will go to:
Faced with foreclosure on her Russellville, Indiana home, Christina Snyder allegedly concocted the kind of plan that now has insurance executives on edge.
According to the county prosecutor, the 31-year-old Snyder allegedly offered to pay a neighbor $5,000 to help her burn down her house and make it look like a botched rape attempt - all in order to claim $80,000 in insurance money. Snyder wanted the neighbor to bind her hands in duct tape, write “whore” on her shirt, and then help her escape once the blaze was set, the prosecutor says. The neighbor demurred, instead reporting Snyder to police.
Faced with that sort of behavior on the upswing, it’s no wonder the insurers are refusing to pay. It’s also possible that, should lenders be required to notify hazard insurers of a pending foreclosure action, those insurers will immediately cancel their contract citing material adverse change. Which would leave lenders and their investor high and dry — and hike loss severity further.
We’ll keep out ears to the ground for the ruling out of Tennessee …
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“Which would leave lenders and their investor high and dry — and hike loss severity further.”
Well, maybe, but not for the reason you’re suggesting.
If the borrower’s policy gets cancelled, the lender/investor will simply put forced place insurance on it. The lender/investor will be covered for hazard loss, at least up to the amount of the loan - but at a cost they are paying (rather than the borrower), and at a cost that is generally much higher than traditionally underwritten homeowner’s policies.
So, if the lender/investor have higher loss severity due to the cancellation of the borrower’s primary homeowner’s policy as a result of foreclosure, it will probably be because they are picking up the tab for what is generally paid for by the borrower, and because that tab will include relatively expensive insurance. Of course, should the borrower clear the arrearages - which will include the FPI premiums in most cases - the lender/investor is no worse off than before the default.
This would actually have an interesting perverse effect, as FPI is chargeable to the borrower under most notes/deeds of trust/mortgages, and as FPI is usually much more expensive than borrower-placed coverage. In short, it will act to increase the arrears of troubled borrowers - making it harder to cure the arrears and save one’s house.
The sound you would probably hear at this point is the wailing and gnashing of teeth amongst consumer advocates. I’m guessing their conclusion here will include some amalgamation of “banks need to pay for it”, “banks are bad”, “tenants good”, “I like wheatgrass”, and a few other undiscernible grunts and vowel sounds.
But, before it even gets that far, I can also say that to date, no insurer has yet shown the cajones to - as a general claims policy - cancel an otherwise current homeowner’s policy due to default or foreclosure. And, I can guarantee that any insurer who institutes that policy will end up with a new surname: Defendant.