When a Disaster Hits, What To Do With Your Mortgage ?
What should you do with your mortgage when a disaster hits? What are the options and obstacles? It’s not common, it’s not uncommon. Damage to your home can occur from various disasters. Hurricane, tornado, flood, wildfire, earthquake, blizzard/ice storm. Even the most recent Covid-19 pandemic resulted in a declared disaster. When these events occur, federal as well as state declarations can affect how you handle your mortgage. These also change how your servicer/lender handles your mortgage. How many uninsured homes, individuals, and businesses the disaster affects determines much of the federal classification as a disaster.
Take the first step; review your property insurance. Do you have the contact for your insurance handy even if a disaster destroys your home? What about your policy numbers? Do you know your coverage, deductibles and what the policies cover? Insurance may not start for a period of time. Where will you stay? How will you pay for it?
Other factors go into declaring a disaster. But once declared as a federal disaster, various help options kick in if the loan is a federally owned loan. It’s important to understand the difference between a federally owned mortgage loan and a privately owned mortgage loan. Winning Mortgage, Winning Home walks you through the difference. In addition, the book discusses insurance options, maximizing insurance proceeds and recoveries. The book guides you towards getting a home back to the same, or even better, condition than before the disaster event.
SBA and FEMA
The potential for other help comes from the Small Business Administration Office. It’s Office of Disaster Assistance (SBA ODA) provides help, but can be very slow to navigate. This agency normally lends to small businesses as its name implies. But the SBA also provides low interest rate loans to homeowners and businesses in a declared disaster area. However, it is limited in what it can provide and by the amount of money appropriated for it by Congress. SBA also helps non-profits. All of its assistance comes in the form of loans which must be repaid. SBA works together with the Federal Emergency Management Agency (FEMA) during a disaster.
FEMA can provide vouchers for temporary housing and meals. It also can give limited grants which do not need to be repaid. It has a narrowly focused mission and cannot provide long term help in a disaster.
FNMA and Lenders
Let’s look at Fannie Mae loans when a disaster hits and leads to a federal disaster declaration. FNMA is the largest of the two Government Sponsored Enterprises (GSEs). It remains federally controlled (in conservatorship) and subject to federal oversight. FNMA also leads in developing many requirements, guidance, and rules for making loans. Others generally elect to follow these. FNMA makes conventional loans. But it doesn’t actually service any loans.
This means FNMA owns payments, but not the collection or recording of payments. Borrowers have no contact with FNMA directly. Borrowers will contact a different company. That company may be the original lender. Quite frequently a transfer or sale of the mortgage occurred, removing the original lender. Once a transfer occurs, the contact becomes the new company, not the original lender. Borrowers must contact the company to whom they make payments.
Servicers
When a disaster declaration occurs, FNMA’s servicer must provide counseling to the borrower as to possible workout options. The borrower does not receive forgiveness, grants or other direct monetary assistance. The servicer will also direct the borrower to FEMA and SBA as options. FNMA maintains a Disaster Response Network (877-833-1746) contact point for borrowers needing assistance.
The servicer reviews each loan on a case by case basis. It evaluates damages, expenses, and repairs for delinquent loans as a result of the disaster. The servicer ensures that FNMA’s interest is protected to recover any insurance proceeds. A servicer may or may not reach out to provide guidance to a borrower. The burden falls on the borrower to know what to do with your mortgage when a disaster hits.
Note that FNMA acts to maximize its recovery, not specifically the borrowers! Usually, the goals align. Repair the home and keep the mortgage in place benefit both parties. But many times FNMA’s goals may not exactly align with a borrower’s goals. This occurs where the borrower doesn’t have the ability to repay the original loan if new loans are required for repairs. Or, the borrower may have physical or other injury which may jeopardize income. Other circumstances play a role to cause the borrower and FNMA’s goals to diverge.
Options and Assistance Review Steps
While there are options when a disaster occurs, the first KEY ELEMENT requires the servicer to establish appropriate contact with the borrower. Borrowers many times try to avoid these attempts at contact. Avoiding contact puts the borrower in the express lane to foreclosure or bankruptcy as the only options. How does the servicer know if the borrower has been affected by a disaster if the borrower avoids all contact? If the borrower has any ability to recover, it must not avoid contact with the servicer!
A borrower may be unable to resolve a delinquency due to various factors. These factors include financial hardship, uninsured damages, and loss of income . Paying a mortgage in the face of these factors becomes difficult. If these affect the borrower, the servicer goes to a secondary review. Can the loan be repaid if a payment deferral is provided? Limits of time exist for the length of payment deferral. If the loan is greater than 12 months delinquent, this option generally goes away.
The third step if a deferral isn’t appropriate moves to a look at a loan modification. A loan two or more months delinquent prior to the disaster lessens a loan modification as an option. While not absolutely unavailable, a modification becomes more difficult.
If a loan modification wont work, the servicer moves to a fourth step. The servicer next evaluates whether to pursue a short sale or deed-in-lieu of foreclosure (the borrower walks away).
Forbearance and Delinquency Guidance
In the current environment, some borrowers may be in forbearance. Borrowers in forbearance have the same options. However, the term of forbearance in effect prior to disaster may affect which step the borrower begins with.
FNMA and FHLMC direct their servicers to continue to try to contact borrowers in the normal course of delinquency, forbearance or disasters. When a disaster hits, the servicers can also evaluate loans for modification based on the information in hand. If a borrower took out a loan five years ago or ten years ago, new information likely guides any decision. Old information has only limited use. Borrowers eligible for a deferral or modification need to have read Winning Mortgage, Winning Home. Understanding the necessary elements for a successful escape and recovery from the disaster improves likelihood of success. Learn what to do with your mortgage when a disaster hits. It helps in recovering the quickest and most thoroughly.