Thanks, Hurricane Irene-As If Closing A Mortgage Loan Was Not Tough Enough….
….it has just gotten tougher! Due to the severity of the storm, a lot of properties suffered flood damage. As a result, the lenders want to make sure that the property, which is their collateral for the loans, is still worth what it was before the storm. So, they are requesting two items to confirm this. As is the case nowadays with lender’s underwriting requirements, one is perfectly reasonable and understandable while the other is unnecessary and will continue the cycle of loan closing delays.
The first requirement (i.e the reasonable one) for any properties which are located in the storm areas (which encompasses most of the East Coast), will require an updated inspection from the appraiser to certify that the property has not been damaged and that its value is still the same. This will involve a site visit by the appraiser, a certification from the appraiser and a review of the certification by the underwriter. As such, it will likely delay all closings by 1-2 weeks. This is a fairly standard process and one that is undertaken frequently when a national disaster is declared. An unfortunate delay, but one that cannot be avoided.
However, in the category of either (i) abundance of caution or (ii) overkill by the lenders (choose your “fill in” here), some lenders are also requiring a letter from the borrower’s insurance company indicating that no insurance claim has been filed. Besides the additional delay this will cause to a closing, as I imagine insurance companies have a lot more important things to do right now than write letter to lenders, it is a completely excessive and onerous requirement when applied across the board!
In the first place, the appraiser’s inspection of the premises (which I assume will include some new photos showing the structure is still standing) will indicate any and all significant damage. At that point, based on the inspection, certification and photos, the lender can decide if any additional documentation is needed. But, to require an insurance letter on every loan as a standard condition is a waste of time and resources (i.e. EVERYONE’s time and resources). This is even more so when most of the damage, if at all, will be to BASEMENTS. The most incredulous part of that, is that based on current underwriting guidelines, no value is even allocated to a basement! So, even if that basement is unusable or destroyed it cannot have an affect on the appraised value of the house!
As a final commentary on this, why does the filing of an insurance claim have a bearing on the loan in most cases? If someone has some minor damage and has filed a claim, then they will repair the damage. And if there is major damage, the extent of the damage will be shown on the appraisal inspection (as noted above). The point here is that the mere filing of the insurance claim, is not proof of anything that will affect the collateral. The collateral itself and the state of the collateral as evidenced by the appraiser’s inspection is that proof! In cases where damage is indicated by the inspection, a letter from the insurance company is certainly warranted. However, as a purely prophylactic measure on EVERY loan, it is outrageous. The fact that this will cause additional delays in most closings, is inexcusable. Or, as John Stossel would say, “Give Me A Break!”