Reaping a Recovery
July 29, 2016
The U.S. Department of Housing and Urban Development’s release of Mortgagee Letter 2016-02 this year marked an important step in bridging the gap between investor requirements and mortgage field services best practices. It provided one standard of property preservation across the country, addressing issues like the need for additional allowables, conveyance timeframes and mold remediation, just to name a few. HUD’s Mortgagee Letter 2016-02 also updated guidelines focusing on the importance of the hazard insurance recovery process and the role the hazard insurance recovery vendor plays in this process. It requires mortgage servicers to pursue insurance recovery and to make repairs with hazard claim settlements. To comply, all lenders and mortgage servicers need to ensure they have a qualified mortgage field services provider with a dedicated staff that handles the hazard insurance recovery process to maximize recovery and reduce losses.
The mortgage field services partner plays an important role in the hazard recovery process. They are the eyes and ears of the mortgage servicer and the hazard recovery vendor. Additionally, damages are discovered when the mortgage field services provider is completing inspection and preservation services. This discovery triggers the hazard insurance recovery process.
IMPORTANCE OF IDENTIFYING AND CATEGORIZING DAMAGE
When the initial inspection or preservation services are completed and damages are identified, it is important that these results contain the necessary documentation so the mortgage servicer, or its hazard recovery vendor, can make a determination on whether or not to file a hazard insurance claim. The documentation should include the following information:
Type of peril – Damages must be classified correctly. For example, broken pipes can be from theft or vandalism, freeze damage or mortgagor neglect or wear and tear. How the damage is reported can affect whether or not a mortgage servicer or their hazard provider will initiate a claim. It also may affect how the hazard insurance company views the claim and whether or not coverage is provided under the policy.
Description of the damage with an estimated cost to repair – Mortgage servicers need to know what is damaged, are the items missing or damaged, where the damage is located and an estimated cost to repair. Missing or damaged fixtures that are cosmetic in nature with a low estimated cost to repair may not result in a claim being initiated. For example, missing door knobs on the interior door or light fixtures can be low cost and considered a cosmetic issue, which will not justify a claim being initiated. Items considered essential to the home, like hot water tanks, furnace, plumbing systems, toilets and air conditioning condensing units have a higher cost and typically would justify initiating a claim. Sufficient details must be provided so the mortgage servicer or its hazard vendor makes an appropriate decision on whether to initiate a claim.
Date of discovery – The date the damage condition is discovered needs to be timely and accurately reported. This can significantly affect what policy was in force at the time of the loss. Inaccurate information can affect the amount of out-of-pocket costs the mortgage servicer may incur (deductible) or the timely resolution of the claim (if you file with the wrong carrier, you may have to refile). If the claim is not submitted in a timely manner, coverage can be denied.
Photos – Detailed photos that support the damage condition being reported are essential. These photos are key information the mortgage servicer or its hazard vendor need to verify the extent and cause of the damage. Photos memorialize the damages so if another event occurs there is documentation of the condition in support of the claim that was initiated. It also can significantly help in expediting the settlement of the claim and, in some cases, the hazard insurance company may issue settlement specifically based on the photos of the damage.
Once the claim has been concluded, the mortgage servicer needs its mortgage field services provider to confirm the scope and pricing issued by the insurance company accurately reflects the damages. It is important to engage a mortgage field services provider that is knowledgeable and has a skilled network of vendors that understand how the hazard insurance companies issue settlements and the documents that reflect what has been covered. The insurance carrier will typically issue two sets of documents — the Explanation of Benefits (EOB) and a scope of work that is an itemized estimate of the work. The EOB outlines the coverage provided and breaks down the settlement. It will detail if there are conditions that were not covered and if there is recoverable depreciation that can be claimed after repairs have been completed. The scope of work will provide a detailed estimate of what repairs the insurance company has estimated need to be completed to address the damages and the allowable costs.
The mortgage field services provider will need to evaluate the EOB and the scope of work from the insurance company and engage a qualified vendor to verify the accuracy of the settlement that was issued by the hazard insurance company. If the settlement is found to be deficient in pricing or scope of work to be completed, the mortgage field services provider needs to be able to prepare a package of information that the mortgage servicer or their hazard recovery vendor can present to the hazard insurance company for consideration.
This should include:
- An itemized estimate that clearly outlines what work was not covered in the scope or work provided by the hazard insurance company or that is not priced properly. The estimate should not duplicate items that are covered in the hazard insurance company’s scope of work and only include items that were missed by the insurance adjuster or not priced properly.
- Photos of the items that were not covered in the scope of work. These photos should clearly support the claim that the items are missing or damaged.
- If local code requires additional work or upgrades providing documentation from the local authority or the actual wording from the building code needs to be provided along with any other documentation supporting the claim.
COMPLETING INSURANCE REPAIRS
With HUD’s requirement to seek insurance recovery and complete repairs with the funds recovered, it is important that mortgage servicers have engaged a mortgage field services provider that has a network of vendors that can complete the repairs. Work must be completed in a timely manner and in accordance with the scope of work that was issued. If the work is not done correctly the mortgage servicer may face the following issues:
- Delay in completing the work may result in the mortgage servicer being unable to claim the recoverable depreciation.
- Incomplete repairs may result in the insurance carrier only issuing only a partial settlement for the recoverable depreciation.
- Incomplete work can result in HUD issuing a reconveyance.
The mortgage field services provider needs to have a network of vendors that are knowledgeable and trained to handle repairs based on insurance settlements. A dedicated team with a quality control process that ensures all work has been completed in accordance with the scope of work will eliminate loss of recoverable depreciation funds and minimize reconveyances.
While HUD’s Mortgagee Letter 2016- 02 took great strides to improve property maintenance issues, hazard insurance recovery still remains a delicate process. Only skilled, knowledgeable mortgage field services providers with vendor networks trained to understand the process will prevent losses, improve conveyance timelines and increase financial recoveries. Those providers who have deep claims expertise are imperative for maximizing hazard insurance recovery and ensuring damages are properly mitigated at the property.
Source: DS News (Reaping a Recovery [pdf])