Your Property Insurance vs. Current Appraisal

A reader asked about a post I had written a long time ago about property insurance. Her question relates to the realities of today’s marketplace.

First, she wants to get her premium down because the home is not worth the amount of the policy limits. So she wants to go to her insurance agent and ask for a site survey and a “re-do” on the insurance. Her premise is that the insurance company will decide that the home, once purchased for $700,000 is now worth around $400,000. The value of the land is, by her estimate, not worth more than $75,000. So, she says she wants to lower her premium on what had been a $700,000 policy and would now be a $325,000 policy, since the land would still be there even after an insurable event. It makes sense but there are many wrinkles in this plot. The first one is what will the insurer say?

So, her second premise is that the insurance company will notify her “lender” about the reduction in insurance, if indeed the insurer agrees with her in Part I. Of course the contract for insurance might speak of replacement value, and that might include factors like what it would cost to rebuild the house and she knows that it might cost a little more to rebuild the house than the fair market value or it might cost a little less. Here are her questions and my suggested answers:

  1. Who does the insurer notify? In fact, with whom is the insurer communicating now?
  2. Has the insurance company taken into consideration the fact that while they must pay in an insurable event, there is a question of whom they must pay if the loan was securitized.
  3. What will the receiver of this information (servicer etc.) do with it. The property has a $600,000 mortgage on it. The property is worth $400,000 and the insurer is not going to insure it for more than it is worth. So if there is an insurable event, like the house burns down, the proceeds of insurance will only be $400,000 leaving a $600,000 mortgage on a burned down house where the insurance proceeds at only $400,000.
  4. Will the “lender” demand that the homeowner rebuild? What if the homeowner won’t or can’t?
  5. Will the “lender” demand the entire proceeds of the insurance policy?
  6. What will the “lender” do about the balance?
  7. If the homeowner stops making mortgage payments what are the remedies available to the lender? In this scenario it is highly unlikely that the homeowner would continue to make payments, and even if they did, the amount of the principal at least would need to be adjusted and perhaps the rest of the “mortgage” would need modification, assuming the homeowner is willing to keep paying.
  8. If the “lender” forecloses, what do they get?

These questions and more lie at the heart of the mortgage mess. The core of the entire scheme was appraisal fraud at both ends of the transaction — lying to the investor-lender and the borrower about the value of the property. Everyone made money except the investor-lender and the borrower for that reason — the appraisal was intentionally inflated in order to satisfy demand for mortgage backed bonds. That demand was based upon AAA ratings (appraisal) which in turn were based upon “honest” appraisals of the value of the property and the credit worthiness of the borrower.

The reality of the insurance company stating that it won’t insure the property for $700,000 when it is only worth $400,000 forces another issue: the borrower is technically in default of the mortgage terms (or Deed of Trust). The terms of that security instrument require that the insurance equal the balance due on the mortgage. That was an easy thing to do before the era of securitization and appraisal fraud.

So going through this exercise of getting the insurance premiums down, a valid thing to do as viewed by the homeowner and the insurer, forces an issue. It might be that a declaratory action stating the conflict between the requirements of the Deed of Trust (or Mortgage) and the reality of the marketplace create an obvious controversy in which the instrument declares that the borrower is in default but the borrower has no available way to comply with the insurance requirements under the mortgage. The declaratory action would need to declare the rights of the parties and whether the borrower is now in default — through no fault of the borrower. It is probable that even if the insurance policy is not changed, that it would not pay more than $400,000 anyway.

The devil is in the details. Whom do you sue in the declaratory action? We again come face to face with the realities of securitization as it was done in practice. The suit would need to be against the lender of record. The servicer does not appear to be a proper party to such a suit, just as they are not a proper party in a quiet title action. Assuming the Court takes jurisdiction and makes a decision, that judgment would need to identify the name of the lender and the name of the borrower.

This is a round about way of flushing out the real creditor, if there is or ever was one.

15 Responses

  1. This is one of a best insurance knowledge. Thx for your post.

  2. There are several types of insurances involved…

    Mortgage Ins – pays for default on the loan

    Firem Flood, etc are Hazard Ins – which replaces or repairs the improvements…

    Mortgage Ins & Escrows established for property taxes creates an issue of insurance & tax fraud…

    The borrower is FORCED to purchase mortgage insurance based upon an inflated appraisal forcing over-payment for the insurance. If the loan was based upon 700k and it is vaulued at 400k – that seems like fraud to me.

    Opinion Snip from Appellate Court:
    The contract is void if it is only in part connected with the illegal transaction and the promise single or entire.” Guardian Agency v. Guardian Mut. Savings Bank, 227 Wis 550, 279 NW 83

    Opinion Snip from Appellate Court:
    It is not necessary for rescission of a contract that the party making the misrepresentation should have known that it was false, but recovery is allowed even though misrepresentation is innocently made, because it would be unjust to allow one who made false representations, even innocently, to retain the fruits of a bargain induced by such representations.” Whipp v. Iverson, 43 Wis 2d 166.

    When taxes & insurances go up – so do house payments that include escrows for those items. If the servicers continue servicing escrow accounts without re-adjusting the payments, isn’t that servicing fraud?

    If the house was 700k and the borrower has evidence of appraisal frauds committed by that lender – then that loan is fraudulent… At the very least, a judge should force that loan to be rewritten. The new amount should be figured by taking the new appraised value – subtracting all payments as 100% principle – subtract all loan costs – and the new loan rate should be 4% 30yrs and all payments sent to a specific account held by the state or fed. The money should NOT be paid to the lender as penalty for the fraud.

    This would replace the funds stolen from the tax payers and allow folks to maintain their homes.

    just some thoughts.

  3. WEST PALM BEACH — Two senior judges and six case managers have been added to tackle Palm Beach County’s foreclosure backlog, with salaries paid for by $640,000 from state coffers.

    The new 15th Judicial Circuit employees, including four clerical assistants, last week began to whittle down the estimated logjam of 52,000 foreclosures in county courts.

    The money to hire the additional workforce is part of a one-time statewide court allotment of $6 million. The Palm Beach County Clerk and Comptroller’s Office received $403,000 out of a $3.6 million statewide allowance to handle the foreclosure paperwork overload.

    Palm Beach County Clerk Sharon Bock expects to hire about 15 temporary employees with the county’s share of money.

    Before last week, the county had just one full-time foreclosure judge.

    “Hopefully we’ll be able to make some progress on the backlog,” said Peter Blanc, chief judge of the 15th circuit. “We’re in new territory and trying to figure out how it will all play out.”

    The 19th Circuit Court, which includes Martin and St. Lucie counties, received $212,729 to hire senior judges, case managers and administrative assistants.

    Judges are paid $350 a day, a fee set by the state.

    Blanc said it is important to clear the foreclosure cases so that vacant and dilapidated homes can go back on the market, presumably increasing neighborhood property values. The two senior judges joining foreclosure division Judge Meenu Sasser are Howard Harrison and Roger Colton.

    Blanc estimated the number of foreclosure summary judgments heard in the county each week will increase initially from 1,000 to 2,000.

    Requests for summary judgments are made in lieu of a full trial request. They are often filed by lenders who believe they have evidence showing there should be no issues in dispute, such as affidavits on how much is owed on the home and the number of missed payments.

    Earlier this year, Blanc said there were 5,000 summary judgment requests that could not get calendar dates. He hopes to have all of those taken care of by late August.

    Homeowner advocates fear the courts may be in too much of a rush to clear the cases, possibly overlooking details such as proof that the lender holds the mortgage note.

    “It seems like the goal of the judicial system is to process these cases as fast as possible,” said Lisa Epstein, a West Palm Beach homeowner who is fighting a foreclosure and runs a website, foreclosurehamlet.org . “Doing a rush job at this point is benefiting one party and one party only, and that’s the foreclosure entities.”

    Trent Steele, a Hobe Sound attorney who specializes in real estate transactions, said much of foreclosure law has been formed in the past few years as cases skyrocketed following the real estate bust.

    Palm Beach County had just 3,049 foreclosures in 2005. That shot up to 30,227 last year, records show.

    “The whole issue of lenders’ rights in foreclosure when there are questions of ownership of the note or where there is a securitized trust involved are really complex,” Steele said. “It may take some time for these judges to get up to speed with that.”

    In many summary judgments, Blanc said, the homeowner doesn’t appear, possibly making a decision to strategically default – walk away.

    “We want to be efficient but not rush,” he said.

    But Steele said the no-shows are often the result of homeowners not knowing their rights.

    “They don’t think they have any defenses or know that there are ways even if they are in default to defend against foreclosure,” Steele said.

  4. I am dealing with the serivcer and insurance company right now.
    On 4/10 Debt collector/ Servicer sent me a notice saying when the loan was transferred to them there was not a hazard insurance was in place
    My policy has been in place yearly paid by me directly to insurance company for the past two years since I went through bankruptcy.
    I did not contact SLS because I will not play their game .They are the third buyer of my loan. (3rd new loan number in 2 yrs) Home was filed in Chapter 7 two years ago and still no foreclosure and I never reaffirmed. ( Who would I reaffirm with if I wanted to. the pretender lender, servicer, debt collector …LOL)
    Next on 5/10 I get a notice saying my policy ( that they said did not exist )is insufficient and needs to be for replacement value and name them as loss payee)
    Again I do not respond.
    I know they are not the true party of interest.
    Next I get a letter in 6/10 from my insurance company Liberty thanking me for adjusting my insured value!!!
    Someone at the SLS (Servicer/ Pretender lender ) must have contacted my insurance company and changed my policy value and loss payee!!

    Can just anyone call and change someone else’s insurance?

    My note is for 900,000+, the value of my home today is 579,000, land value is 162,000. For replacement cost purposes we have it insured for 650,000 which was very generous since the land is still there.

    Still not sure how this will all play out. I would like to have the proper party of interest named on the policy. But since that person is illusive to me the owner I have a good mind to call the insurance company and change the loss payee to myself !

  5. When I refinanced my home was worth according to the appraisal $1,490,000.00 three months later, it was appraised at $950,000.00 by that time everyone involved had already spent their ill gotten fat commissions , including the undisclosed 3 point yield spread premium.

  6. Would Hazard Insurance companies sue the Loan originators, appraisers, and securitizers for insurance fraud?

    these parties procured a system of fraudulent appraisals, transactions, and they have a bunch of homes that over insured in today’s market. Their liability definitely outstrips the value of the homes and all of this because these people colluded into and massive fraud and double headed pyramidal scheme.

    That is what derivatives are a fancy way of calling pyramid schemes that until now are tolerated by the US law enforcement agencies. If I tried to do this game with my neighbors as the lenders, pretender lenders and others did with all this mortgages, I would have the police pounding on my front door because i would have committed a felony.

    These guys and girls are still driving the Maseratis and Ferraris
    What is wrong with this picture. If I create this system for my enrichment, I would be called a crimminal, thses guys were called financial geniuses.

    Thanks Mr. Garfiels and everyone for this blog, share the info with all your neighbors, I am doing that, teaching all my neighbors about this blog and doing picnic seminars for their information. This is quite a revolution.

    Everyone is so mad!!!

  7. The insurance company can’t require you to save on the claims expense by donating your time as a general contractor, nor would it be prudent for them to base their premium on how low the local barroom braggard says it can be done for.

    They invest heavily in sophisticated third party software that estimates local reconstruction costs based on actual claims.

    I’ve yet to see an insured claim they were over-insured after a total loss. Sadly, underinsurance continues to be the norm.

    The market value of your home has no relation to your property insurance needs.
    Yes, policies based on actual cash value (replacement cost less depreciation) are available, but they are rarely a prudent choice, certainly not for any property being used as loan collateral.

  8. I went through this in both of the last 2 years .. you’re banging your head against the wall with the insurance companies … My home has a fair market value of $160k (down from $370k) with the land at about $40k of that meaning that the existing house is valued at just over $40/sf … I know I could rebuild the house for about $75/sf with myself handling general contractor duties and do it with far superior materials and systems. The insurers (my agent represents about 15 companies) all insist on about $105/sf (down from $125 a few years ago) for replacement coverage, I think they use a standard formula for the “quality level” of the home and a labor factor for the region…..

    As the insurance companies have regulatory deadlines in which they need to pay out on claims using questions about who to name on the check just won’t work.

  9. I realize I’m referring to the ‘servicer’. That is the only entity that any of us have a means of contacting.

    With MERS and the ‘servicers’, we have no way to contact any investor who was our REAL lender.

    If the lot that your house is on is worth $100K, the amount of the insurance should not be based on that part of the ‘value’.

    At some point, it is going to come up again that the insurance companies CAN NOT insure the buildings for more than the value of the IMPROVEMENTS. They never could do so legally. I question the legality of the replacement insurance that any lender forces placement of.

    With property that makes of a significant portion of the property’s total value, I had a closing that got delayed while the insurance company forced the lender to accept insurance on JUST THE IMPROVEMENTS. The amount of the loan was less than 75% of the total property value, bu the land part was making up more than 25% of the value.

  10. Servicer, servicer, servicer.

    Where in any mortgage does it state that the “servicer’s” interest must be insured?

    Where does it state in a mortgage that the servicer can declare a breach?

    Does it even mention the word “servicer” on any note?

  11. it really is best of both worlds for the insurer–unless as noted, the contract is replacement cost. The typical insurance provision lets the insurer off the hook for any excess coverage beyond market to prevent people from arson to collect on an over-insured home. however, it works to their advantage now—–the insured’s insurable interest is limited to market but his exposure is the face of the note. The servicer will treat reduction in insurance as a breach–justifying foreclosure. Then the servicer can place the foreclosure money in his collection account balance and earn the income stream as allowed by the servicing agreement on this “float”.

    But in the end the insurers are profiting immensely too. the servicer will be notified and will step in and pay the insurance–add it to the foreclosure claim. I do not see how this helps flush anybody out-the servicer is calling all the shots.Only thing flushed will be the homeowner –out of the house. Then the deficiency . If the house burns and the insurer wont pay more than market, its no defense on the note. It is owed–the servicer will get the proceeds directly from the insurer and the deficiency will be due too. The one plus is that market is probably higher than distress sale price in foreclosure-so a homeowner is probably slightly better off if the house burns than if its foreclosed–albeit not a choice. Query whether Fannie will treat a homeowner who walks on a fire deficiency as a strategic default?

  12. The servicer’s normally DEMAND that the insurance be sufficient to cover the ENTIRE mortgage.

    What about the fact that they are demanding that even the part of the value based on the LAND be included in the amount of the insurance, instead of requiring insurance to cover the value of the IMPROVEMENTS only?

    At one time in the past, I had pointed out to my own agent that PART of the value was the LAND which did NOT require insurance and that the demanded policy was in excess of the value of the improvements.

    As I recall, the agent did contact the servicer because the amount they wanted the insurance contract written for exceeded the value of the improvements. The IMPROVEMENTS are the only thing that the homeowner’s insurance policy is to insure.

    I think that in my own case, which occurred prior to the days of securitization, the servicer agreed to reduce the level of the required insurance policy by the full amount of the land value.

    In a later skirmish with a different mortgage, but the same insurance company, the insurance company contacted both me and the servicer to inform them that the policy could NOT be written for the total the ‘lender’ wanted. USAA stood their ground. The policy stays in step with the IMPROVEMENTS only.

  13. And… If the “mortgagee” is MERS, why isn’t IT named in the insurance policy rather than the “servicer?” Why isn’t the insurance company talking to MERS instead of the “servicer” to inform of policy changes?

  14. Ive been wondering abou this too. But couldnt you just go out and get a new insurance company? They would offer you protection based off of the current value and then you would just have to notify your lenders escrow dept that you have a new insurance company and give them the new info. People change insurance companies all the time.

  15. The market value of the home is not the basis of the insurance premium: insurance is purchased based on the cost to re-build the home (not the cost of new construction).

    The market value also has no impact on a replacement cost claim. The statement “It is probable that even if the insurance policy is not changed, that it would not pay more than $400,000 anyway” is not true.

    She can certainly ask her agent to check the estimated reconstruction cost (the agent has the software), or she can do it herself for $8-$10 (accucoverage, e2value, or 360-value).
    Avoid the “free” cost estimator sites, these aren’t for insurance.
    The cost approach section of a real estate appraisal is not for insurance, that’s a new construction cost estimate.

    With a good value in-hand, she can try and reduce premiums by shopping (to multiple agents) and by considering higher deductibles, not by playing with the insurable value.

    The lenders’ minimum requirement is to protect their collateral, this is likely not enough to protect your equity or prevent a significant coinsurance penalty on a partial loss.

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