Reverse Loans & Fires

The news from southern California is not good. Nearly 900,000 people have been asked to leave their homes because of raging fires, a disaster that will displace large numbers of households and cost billions of dollars.

I don’t remember natural disasters of the scale seen in recent years. It seems difficult to imagine so many people and so much land involved.

Part of the issue is that we simply have more people and people need land for housing. But another part is the obvious change in weather patterns — doubters will moo about the lack of evidence regarding global warming, but here in Washington it has been above 90 degrees in late October, not exactly the right temperature for early-morning frost.

The fires raise a reverse mortgage issue: If a home has a reverse mortgage and burns down, what happens?

The house is security for the loan. The lender will insist on appropriate insurance so some or all of the financial damage will be contained. The house can then be re-built or the reverse loan paid off from the insurance proceeds.

HUD guidelines state the following:

Fire, Flood and Other Hazard Insurance. Borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire. This insurance shall be maintained in the amounts, to the extent and for the periods required by Lender or the Secretary of Housing and Urban Development (“Secretary”). Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary. All insurance shall be carried with companies approved by Lender. The insurance policies and any renewals shall be held by Lender and shall include loss payable clauses in favor of, and in a form acceptable to, Lender.

“In the event of loss, Borrower shall give Lender immediate notice by mail. Lender may make proof of loss if not made promptly by Borrower. Each insurance company concerned is hereby authorized and directed to make payment for such loss to Lender instead of to Borrower and Lender jointly. Insurance proceeds shall be applied to restoration or repair of the damaged Property, if the restoration or repair is economically feasible and Lender’s security is not lessened. If the restoration or repair is not economically feasible or Lender’s security would be lessened, the insurance proceeds shall be applied first to the reduction of any indebtedness under a Second Note and Second Security Instrument held by the Secretary on the Property and then to the reduction of the indebtedness under the Note and this Security Instrument. Any excess insurance proceeds over an amount required to pay all outstanding indebtedness under the Note and this Security Instrument shall be paid to the entity legally entitled thereto.”

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This entry was posted on Thursday, October 25th, 2007 at 1:46 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.