DIMONT Insights

Last year we watched as Hurricane Maria became one of the costliest hurricanes in history, totaling an estimated $90 billion in damages and leaving millions of people without power and necessities for an unprecedented amount of time. Of the areas affected by Maria, Puerto Rico endured the worst of the storm’s damage and casualties. The island has made considerable progress in recovery, but our research suggests that a long road is still ahead.

Mortgage lenders and homeowners nationwide know the importance of purchasing various types of insurance for the home. Flood insurance, however, is a coverage often overlooked by those who feel water isn’t a threat to their location. We saw how devastating lack of flood insurance can be with Hurricane Harvey, and we’ve seen it again in the aftermath of Hurricane Florence, which highlighted the fact that only about one in 10 homes affected by Florence had flood insurance. According to a report from the Washington Post, the areas with the worst Florence-inflicted destruction had the least amount of flood insurance.

Tips and Tricks for Auto Lenders Post-Disaster

When natural disasters hit, homes and buildings aren’t the only casualties that require intensive collateral loss mitigation. When considering that an estimated 500,000 to one million vehicles were destroyed in the late-2017 hurricane trio of Harvey, Irma, and Maria, auto lenders typically have their own mitigation chaos to deal with in the aftermath of extreme storms. There are several ways for auto lenders to ensure collateral protection when the worst happens, but we’ve narrowed it down to the three most crucial tips:

The Federal Housing Administration (FHA) has helped support access to affordable housing since becoming part of the U.S. Housing and Urban Development Department (HUD) in 1965. In 2010 the FHA and HUD took protecting market liquidity a step further and implemented the Single-Family Loan Sale (SFLS) Initiative, a program that allows the FHA to accept assignment of distressed, FHA-insured loans from servicers and sell the mortgages as nonperforming loans on behalf of HUD.

Having been in the business of helping loan servicers file insurance claims and recover losses for many years, we’re consistently surprised by a persistent myth that seems to almost be part of the auto finance industry’s collective consciousness: that the insurance claims process on damaged vehicles is actually a net loss to the lender.

The claims process can be time consuming and can generate low success rates when a lender who handles this process in house doesn’t have experienced licensed adjusters on staff. Labor intensive process combined with low success rates and cost of full-time equivalent (FTE) actually support this very myth and will make any CFO question if they are spending $2.00 to recover $1.00.

Perhaps more than any other part of the mortgage business, mortgage servicing stands to benefit from economies of scale, but only if the business can actually be built to expand. In the wake of the foreclosure crisis, many servicers are facing bloated staff rosters and struggling with workloads that would be better outsourced, but setting up a servicing business to effectively outsource is not a simple task.

Vendor management is one of the most import functions in the modern mortgage servicing operation. Much of the work the servicer must do to maintain compliance and to effectively service its portfolio is outsourced to trusted third-parties who perform that work on the servicer’s behalf. Over the past decade, the vendor management function has become much more complex and the corresponding penalties for mistakes have increased in severity.

As a result, vendor managers working within mortgage servicing firms spend a great deal of time determining exactly what functions must be outsourced, evaluating potential partners, contracting with preferred partners, and then managing those relationships – risk management work that must be performed according to a rigorous set of standards and best practices.

The government requires any homeowner with a mortgage to buy flood insurance through the National Flood Insurance Program if the structures on the property fall within the Special Flood Hazard Area (SFHA) of the map. The flood maps are updated periodically; and, it is the servicer’s responsibility to make sure that the properties in its portfolio are properly insured.

In a previous post, we touched on the federal government’s National Flood Insurance Program (NFIP) that requires any property within a Special Flood Hazard Area (SFHA) to carry flood insurance. Determining the sufficient level of insurance coverage for lender placed insurance has presented a problem for some servicers. Failing to insure the property to the correct amount of coverage exposes the servicer to compliance risk.

Federal law requires properties within a flood special hazard area to have a flood insurance policy. The government regulations for determining the correct amount of coverage for lender-placed flood policies are not clear. Over-insuring or under-insuring lender-placed flood policies can cause compliance problems for servicers in addition to having a negative impact on the borrower’s experience.

There are three primary risks for lenders associated with lender-placed flood insurance on properties with multiple structures: