Recorded Webinar: Insuring Wrap-Mortgages

There are many issues involved when insuring wrap-around mortgages and, unfortunately, many investors and buyers are unaware of the potential problems and liabilities that they themselves may be inadvertantly creating by following bad advice, ignoring good advice, or simply refusing to address the issues of loan servicing and insurance billing because they are ‘inconvienient’.   We hope this webinar video is both informative and useful to you.

WRAP MORTGAGE FAQ’s – Why Can’t I Get a Quote With Just Giving Basic or Minimal Information?

We regularly get asked the question “How much does insurance cost?” before even having a chance to put together a quote.  A good answer might be “How much does a red dress cost?” With regards to the dress, the answer is “It Depends”. What kind of dress? What size? What material? Which designer? What store? As you can see, there are many unknown variables that must be taken into consideration when answering that question.

The same holds true with insurance. We have many companies that we work with and in order to put together accurate quotes, we need certain information required by the various insurance carriers – both about the property itself as well as regarding the mortgagee and certain personal information for the named insured(s).  With this in mind, we also have specific property information forms that we use to capture all of this information at one time.  If this information is not provided and/or if the parties simply refuse to supply the information requested, we are not in a position to spend hours making numerous phone calls and repeatedly asking for this necessary data.

The danger with providing quotes with only minimal information is that they aren’t accurate and they will most likely change (increase) in premium once the order to bind the policy has been given and reports are pulled by the carrier and accurate data finally obtained.

WRAP MORTGAGE FAQ’s – Why Do You Need So Much Property Information And What Is The ‘Replacement’ Cost?

In order to develop the amount of insurance needed to adequately protect the property against loss, known as the reconstruction or replacement cost, we must first need to know the physical characteristics of the property such as the square footage, year constructed, number of bathrooms, construction grade, and so on.

As addressed in another question, the reconstruction or replacement cost value is not a number simply chosen at random. Most companies use the Marshall & Swift/Boeckh (MSB for short) data service to arrive at this value. MSB is a large global company which tracks the labor and material costs for every zip code in every county in the United States.  Insurance companies pay millions of dollars each year to utilize the MSB service and when performing quotes, agents are required to input the various construction data about the subject property such as square footage, number of baths, exterior construction, construction grade, and so on. This information is then used to calculate cost per square foot and total reconstruction value for the insured property.

WRAP MORTGAGE FAQ’s – What Is ‘Surplus Lines’ Insurance And Why is The Premium Being Financed?

The Surplus Lines insurance market (sometimes referred to as the non-standard market) exists to provide insurance to clients with risks that are not allowable in the ‘standard’ market.  These companies, most of which are “A-Rated” or better, are required to charge state tax and the carriers also charge policy fees. Some of the reasons a policy may need to be written in this non-standard market include:

• The named insured has experienced a foreclosure or bankruptcy within the past 5 years

• There are an excessive number of claims on the property

• The property itself exceeds the carriers underwriting guidelines in terms of construction characteristics, age, or maintenance conditions

WRAP MORTGAGE FAQ’s – What Happens To The Money In The Seller’s Escrow Account?

The money accumulating in the seller’s original escrow account will continue to do just that – accumulate.  Although the seller may have agreed to transfer all monies in this account to the new buyer – that was an agreement between those two parties, not the underlying mortgagee, and this escrow account is still in the seller’s name. In most cases, the new buyer (or perhaps the seller) can send proof of the insurance policy being paid in full with money outside of this account to the mortgagee and request that funds be released from escrow as a reimbursement.

Unfortunately, any checks sent from this account for reimbursement will only be made out to the person whose name is actually on the account (the seller).  This means that the seller will in turn have to cash this check and then send these funds back to the new buyer.  This may have to be done each year.  This is another inherent difficulty specific to subject-to and wrap-around mortgages.

WRAP MORTGAGE FAQ’s – Can The Seller Of The Property Make Any Changes To The Buyer’s Insurance Policy?

NO. Only the Named Insured (Policy Owner) has the legal authority to make any modifications to the insurance policy, file claims, cancel the policy, or receive refunds.

WRAP MORTGAGE FAQ’s – What Happens If The Buyer’s Insurance Cancels For Non-Payment?

Prior to cancellation for non-payment of premium, the named insured policy owner will receive several notices in order to make payment and keep the policy in force. If the policy does cancel, the named insured can contact us to make payment and we will have the policy reinstated ONE TIME if the carrier will allow it.  If the policy cancels again for the same reason, we will consider this to be a non-performing account and we will not have the policy reinstated.

Note: The reason that we will only reinstate the policy one time for a non-payment cancellation is due to the fact that, in our experience, many wrap-around mortgage transactions are not set up correctly by the parties and insurance is only obtained AFTER the actual closing – with the new property owner electing monthly insurance payments. Many of these policies get monthly notices of cancellations and require numerous reinstatements simply because the insured fails to pay the bill.

WRAP MORTGAGE FAQ’s – Can The Seller Just Transfer His or Her Insurance Policy To The New Buyer?

No. Unlike real estate contracts; insurance contracts (policies) are NOT transferable and they cannot be assigned from one party to another.

WRAP MORTGAGE FAQ’s – Will The Mortgagee Call The Loan ‘Due’ If They Find Out That The Property Has Been Transferred?

This is entirely up to the underlying mortgagee. Unfortunately, this is an inherent risk in all wrap-around mortgage transactions. While no absolute answer can be given, it has been our experience at InsuranceForInvestors.com that mortgagees will rarely call any loan due so long as it is performing and payments are being made.  Again, this is the decision of the original lender, but it is very unlikely.

WRAP MORTGAGE FAQ’s – Will The Underlying Mortgagee Be Notified Of The New Insurance And Will This Inform Them That The Property Has Been Transferred?

Yes – the underlying mortgagee will be notified of the new insurance. Any time a policy is issued and a mortgagee is listed in the policy, that mortgagee automatically gets a new evidence of insurance mailed to them by the insurance company (not the agent or agency) issuing the policy. The mortgagee and any additional insureds or additional interests are also notified if/when the policy cancels for any reason.