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Servicing Corner: Understanding Insurance Claims and Reverse Mortgages

Servicing Corner: Understanding Insurance Claims and Reverse Mortgages

In the wake of the devastating wildfires in Southern California, it’s essential for industry professionals and reverse mortgage borrowers to understand how insurance claims work for properties with a reverse mortgage. The home either has to be repaired or rebuilt (replacement collateral must be approved by HUD or the investor), or the claim funds and/or sale of the property may be used to facilitate a payoff of the loan. In either case, an insurance claim will need to be filed.

In any scenario, the best advice for lenders and loan officers is to encourage the borrower to contact and communicate with their servicer. We are here to help borrowers and provide them with guidance and support as they navigate their options, as well as work through the issue to conclusion.

Steps to Filing an Insurance Claim
If a home with a reverse mortgage sustains damage, the homeowner must take the following steps to file an insurance claim:

  1. Assess the Damage – Document the extent of the damage with photos and written descriptions.
  2. Contact the Insurance Company – Notify the insurance provider promptly to initiate a claim.
  3. Contact FEMA to register for assistance. Visit www.DisasterAssistance.gov or call the registration phone number at (800) 621-FEMA (3362).
    • Insurance policy coverage may vary and there may be resources available through FEMA or other organizations for assistance not covered by insurance.
  1. Inform the Servicer – The servicer must be notified, as they have a vested interest in the property’s condition. Provide the servicer with a copy of all damage assessments, claim adjuster’s worksheets, and inspection reports. Get servicer approval for any replacement collateral before starting to rebuild.

Special Considerations for Reverse Mortgage Borrowers
Homeowners with a reverse mortgage should be aware of the following:

  • Loan Default Risk – Failure to maintain insurance or complete necessary repairs can lead to default, potentially triggering foreclosure. Borrowers need to keep in contact with their servicer throughout the process to ensure that they are aware of the progress towards resolving the repairs that are needed.
  • Partial and Full Insurance Claim Payouts – Once the insurance carrier completes a damage assessment, they will issue a two-party claim payable to the borrower and their mortgage servicer. The borrower will need to endorse the check and send it to their mortgage servicer. In some cases, the servicer may release insurance claim funds in installments to ensure repairs are made and pass inspection.
  • Access to Line of Credit Funds on a HECM Loan: As long as the loan is in active status, the borrower will have access to any Line of Credit. In compliance with the HECM Loan Agreement, Article 4 “Termination of Lender’s Obligation to Make Loan Advances,” the only reasons a lender no longer has an obligation to fulfill loan advances are 1) the loan is due and payable, 2) the loan is in a Non-Borrowing  Spouse deferral period, 3) the loan has been assigned to the Secretary, 4) the lien status is in jeopardy, or 5) the borrower has filed bankruptcy. A borrower who no longer resides at a property as their principal residence or a property that is in disrepair can lead to a loan being called due and payable, but for a lender to no longer be required to make loan advances, the loan must be approved for due and payable by HUD and the due and payable notice must be sent to the borrower.
  • Annual Occupancy Certification: If the home is being rebuilt, and it is still intended to be the borrower’s “principal residence” then occupancy can be certified as such. If the borrower chooses not to rebuild, and/or they don’t intend to occupy the property as their principal residence again, then occupancy should not and cannot be certified. Since the property is no longer the borrower’s principal residence, the loan would then be called due and payable with HUD’s approval.
  • Repair Scams: When making repairs, be cautious. Home repair scams and price gouging often increase when a natural disaster hits. Get multiple bids, in writing, from established contractors with a physical address and be weary of unusually low bids. Ask for references from satisfied customers. Avoid paying contractors in cash with no paper trail.
  • Total Loss / No Rebuild: If there is a total loss and the borrower DOES NOT want to rebuild, they can use the claim funds and any sales proceeds to pay off the loan (assuming the funds are sufficient).
  • Total Loss / Intent to Rebuild: For a home with a total loss, where the borrower DOES want to rebuild, they will need to provide documentation before they start the re-build, so they need to contact their servicer. Docs such as:
    • Signed and accepted contractor’s proposal(s)
    • Contractor’s Substitute W9 – Payee Information
    • Signed Contractor’s Conditional Waiver of Lien (Note: Separate contractor documents are required for each contractor working on the property.)
    • Loss Draft Claim Form
    • Blueprints for rebuild
    • Original Appraisal

When a property is damaged or destroyed it is incumbent upon the borrower to make satisfactory regular progress in completing the repairs. Failure to perform satisfactory progress and keep the servicer updated could result in the loan being called due and payable with HUD’s approval.

  • Non-HECM / Proprietary Loans: All decisions are made by the investor/owner of the loan. Servicers must follow the Investor’s instructions in each case. For those loans where the terms provide for a potential freeze of the Line of Credit funds, that will be determined at a product level by the Investor. Given the circumstances, these borrowers should be prepared for a potential freeze of their funds if that is permitted by their loan documents.

Conclusion
Navigating an insurance claim on a home with a reverse mortgage requires coordination between the homeowner, loan servicer, HUD or the Investor, and the insurance company. By maintaining proper insurance coverage, promptly filing claims, following guidelines, and keeping in regular contact with their servicer, reverse mortgage homeowners can ensure their property remains in good condition while complying with the terms of their loan. Being proactive in understanding these processes can prevent financial hardship and help protect one of the most valuable assets—one’s home.

Below are some additional resources that can be very beneficial, including a step-by-step video for borrowers that can be found at www.reversedepartment.com.

Helpful Resources:

Published by

Darryl Hicks

Darryl Hicks is Vice President of Communications for the National Reverse Mortgage Lenders Association. In this capacity, Hicks writes for NRMLA's publications, manages the association's web sites and social media accounts, assists committees and the Board of Directors, and manages the Certified Reverse Mortgage Professional designation. Prior to joining NRMLA in 1999, Hicks spent three years in the Washington, D.C. bureau for National Mortgage News.