By Russ Lay on December 6, 2011
Each time a hurricane rolls through there are issues with insurance companies. Horror stories surface as homeowners fight with adjustors, discover policies don’t cover expected claims and property insurers battle with flood insurers over which one pays up.
For the lucky ones, a check eventually arrives. But now, many are discovering another headache awaits.
Part of the problem lies with normal banking policies. But we can also chalk a major portion of the current problem to the explosion of mortgage lenders and easy money leading up to the housing bubble.
The result is that many borrowers have mortgages with out-of-town lenders, and in some cases, multiple lenders.
When an insurance company issues a damage check, the check is almost always made payable to the homeowners and, if there is a mortgage on the house, the lender or lenders.
This is where the trouble begins. Like any other check, in order for a bank to accept an insurance check for deposit, all payees must endorse the back of it. Policies vary between banks on how this is handled and in the case of out-of-town lenders, simply getting the check to the right person can be a bureaucratic nightmare.
The Voice contacted three local lenders to discuss their policies. For security reasons, banks do not publicize their check cashing limits or policies, so all local lenders asked to be quoted off the record.
As a rule, if the insurance check is below a certain amount, which varies from $3,000 to $15,000 depending upon the bank, the local branch office will make sure your mortgage loan is current on payments and endorse the check and send you on your way. You are then free to deposit the check in your bank and start repairs.
Larger checks are more problematic. In these cases, the local office may have to send the check through the bank’s interoffice mail system to a bank official with sufficient authority to endorse the check.
For large claims, the mortgage lender might also require the check to be deposited and held while repairs are done. In these cases, the lender will treat the proceeds as a construction loan, releasing funds to the homeowner only as work is done and a bank officer visits the property and notes the progress.
The borrower has the right to ask that he check be placed in a money market account so that it might earn interest, although at current rates, no one is going to become rich by doing so.
In the current environment, many local contractors have suffered sufficient hits to their credit that obtaining materials from building supply companies on the traditional “30-day credit” may be impossible. This places the homeowner in an uncomfortable position if the bank will not release funds until work is completed.
Two of the three local bank lenders we spoke to also stated things go smoother if homeowners hire licensed contractors rather than doing the work themselves. Do-it- yourself jobs have historically run into cost overruns, and many bankers are leery of such arrangements no matter how much expertise the homeowner demonstrates.
Whether you obtain a contractor or do the work yourself, make sure you find out how often the bank will perform inspections and how much lead time they require to schedule an inspection so you or your contractor can make periodic “draw” requests.
If you hire a contractor who requires a deposit or start-up funds, discuss this with the bank holding your check or ensure you or your contractor have access to funds from other sources.
If one has a loan from an out-of-state mortgage company, such as CitiBank or a loan obtained online, from Quicken mortgages for example, the process can become very frustrating, very fast.
It will typically require a number of phone calls just to find out how you get your check endorsed. In most cases, you will then need to mail the check off for endorsement. Be sure to make a photocopy of the check and send it registered mail.
Obviously, this will add time to the entire process. If the claim amount is small, hopefully the lender will return the check to you endorsed and ready for deposit.
If the claim is large and the lender wishes to hold the funds, difficulties for the borrower multiply. How will the out-of-town lender hold the funds, and how does the borrower gain access? Will they open a checking account for you (more paperwork) to access the funds?
If progress inspections of the work are required, the out-of-town lender will not have a local bank officer available to handle them. In that case, they may hire a local appraiser or work with the insurer to find a person to verify repairs at various stages and once again, this type of long distance communication adds considerable time to the process.
Homeowners with second mortgages, typically in the form of home equity lines will also discover that lender also listed as a payee on the insurance check. In this case, the insured will have to track down the second mortgage lender to obtain an endorsement before presenting the check to the first mortgage lender for their endorsement. If both lenders are locally based, the time involved is considerably less than if one or both lenders are out of town.
Note that even if your second mortgage is a home equity line with no balance on the loan, the endorsement of that lender is still required.
The idea that some homeowners will have to mail their hard-won insurance claim checks to as many as two or even three out-of-town lenders has created a sense of frustration and lost time for all parties involved, including the local contractors in need of work.
One local lender, as we finished up our conversation, couldn’t help but add that doing all of your lending business locally makes working through issues like this much easier.