How can servicers prepare for disasters?

Hurricane season has officially started, and will soon be followed by wildfire season and then winter. Each one of these poses different challenges to a loan servicer. The keys to preparing for these potential disasters include fine-tuning service level agreements with vendors who provide insurance tracking and coverage services, pursue hazard claim recovery services when losses occur, or provide preservation and protection activities. It is also important to ensure that internal policies and procedures are current and reviewed with your staff.

Hurricane losses may be covered by wind, flood or hazard policies, or a combination of these. Is this information being adequately tracked? Are the borrowers’ policies being renewed, or are new policies being lender-placed?

Wildfire seasons resulted in thousands of homes burning in several western states over the last several years. This exposed a wide-spread problem of under-insurance. Many homeowners mistakenly relied on their carrier to accurately set policy limits. To date, a high percentage of homes have never been rebuilt because homeowners had insufficient coverage. It is necessary to review insuring requirements with lender-placed carriers.

Winter in the northern states brings the threat of frozen pipes in vacant properties. Most carriers have coverage exclusions for frozen plumbing when properties are not adequately winterized. Lender- placed carriers are beginning to deny ensuing water damage when frozen pipes occur. Preservation companies must winterize properties immediately upon vacancy confirmation. Most investors and mortgage insurers require servicers to preserve and protect vacant properties and will certainly review property maintenance efforts to ensure, at a minimum, proper winterization is performed.

Servicers should be confident that should a large scale disaster occur, their hazard claims recovery partner is prepared to review, file and manage a high volume of claims in a short period of time. It is a good idea to proactively discuss this with your partners to determine their level of preparation and ability to handle sudden and large spikes in damaged property referrals. It is likely that each borrower’s policy will be different than the next. Therefore, it is best if your hazard recovery partner is extremely well-versed in policy interpretation and coverage assessment and qualified and licensed to represent and assist homeowners as well as mortgagees.

A compliant partner is also helpful when a disaster hits. Servicers should ensure their partner employs qualified, licensed experts in hazard claims. We saw the level of regulatory scrutiny following Hurricane Katrina. Having a partner that understands and complies with all the various nuances and regulations in each state will ensure the servicer is protected from improper claims management while providing the best solution to protecting and mitigating their risk.