Hello, LOs!
Federal agencies and local governments are still assessing the damage from Hurricane Ida and how to prepare for the next storm. Today, I asked some of you to explain what happens to mortgages when natural disasters hit.
ClosingCorp, which provides closing cost data for lenders, said that in New York, New Jersey and Louisiana more than $21.1 billion in mortgage sales volume that was scheduled to close before the end of the year may be impacted. Due to hurricane damage, those closings may need to be reappraised, and changes made to underwriting.
However, one LO in California said that the last transaction he remembered as unable to close due to natural disaster was in 1994. That was when a 6.7 magnitude, Northridge earthquake in the San Fernando Valley killed more than 60 people. Many dwellings were rendered uninhabitable. And scores of transactions were disrupted, delayed or canceled, the LO said.
Some LOs said they've never been impacted by natural disasters. Arizona, for instance, is not exactly plagued by earthquakes or floods, one LO pointed out. (But could a heat wave melt a roof? Maybe.)
Another LO said that a refinance last year took 10 months because a tree fell on a home during a storm.
"Sometimes the mortgage process is completely derailed, but more often than not, it just ends up in delays," one California-based LO said. "This time, though, with the immense issues with appraiser shortages and delays, having additional reinspections added to the mix could cause some big issues."
So, who foots the bill when a new appraisal is needed?
Palmer Heenan, director of capital markets at Michigan-based community bank University Bank, explained that natural disaster-related delays on mortgages are commonplace. Federal agencies have varying guidelines, but the GSEs typically leave it up to the lender to sort out.
That leaves retail lenders who sell directly to the agencies with more flexibility, especially if they service their loans in-house. They typically have a servicing department to handle such 'routine' disaster damage.
"No one wants damaged properties, and everyone wants to take care of the borrower. But appraisers take time, particularly in the COVID refi market, and there may be more efficient ways to get the same data," said Heenan.
Whatever costs are incurred as a result of the damage, it's typically the seller's responsibility before closing. Usually the seller's homeowner insurance pays for it, and all repairs must be inspected before the mortgage process moves forward. Entities that securitize mortgages will not buy the mortgage until all the repairs are completed.
With flooding, the process is more complicated. For flood insurance from FEMA, an inspection is required to establish that repairs are necessary. Private flood insurance, while unusual, also exists.
And if the property does not have flood insurance from FEMA? It's a disaster.
"You don't close until damage is repaired and inspected. If you already closed, you can't sell the loan, so the lender ends up with the risk. It may end up in foreclosure," Heenan tells me. "This is unusual but can happen."
If the loan were insured by FHA or VA, the lender can claim on that insurance to pay off at least a portion of the loan. What if the disaster happens before the property was insured?
"If the FHA/VA insurance/guarantee was not yet obtained, you likely are 100% on the hook as a lender," Heenan said.
LOs, how are you changing your practices as a result of the increasing incidence of natural disasters? Send a message to gkromrei@housingwire.com
Georgia Kromrei
Senior Mortgage Reporter, HousingWire
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