Hazzard Insurance Proceeds - HUD reminder to mortgage companies about FHA loans

Hazard and Flood Insurance Requirement Reminder

HUD Mortgagee Letter 2012-19

This is information is from a HUD Notice to All Approved Mortgagees (mortgage lenders) for Single Family Services Managers
 

This Mortgagee Letter is effective September 20, 2012
The purpose of this Mortgagee Letter is to remind mortgagees of HUD’s existing servicing procedures about releasing  hazard insurance proceeds for damaged properties on FHA insured mortgage loans.
At this  time, a reminder of HUD’s policy related to hazard insurance proceeds is especially important due to the extent of the devastation caused by recent natural disasters.

Background

FHA’s standard mortgage document requires that the mortgagee (lender) be named as a “Loss Payee” on the hazard insurance policy.
This  requirement helps ensure that hazard insurance proceeds are available to rebuild damaged property. It also protects mortgagees (lender) if the property cannot be rebuilt and some or all of the insurance proceeds are required to pay off the outstanding loan.  Lenders are encouraged to contact commercial hazard insurers and remind the insurers of the named mortgagee loss payee on the hazard insurance policy.

Timely receipt of flood and hazard insurance proceeds allows mortgagors to rebuild their homes and provide some stability for their  families.

Lenders are strongly encouraged to assist mortgagors by:

1. providing copies of hazard insurance policies and information when requested;
2. promptly releasing hazard insurance claim proceeds when a viable repair plan has been  approved; and,
3. following standard procedures to ensure that hazard insurance claims are filed and settled in an expeditious manner.

Processing of Hazard Insurance Policy Proceeds

In addition to repair coverage for damaged properties, some hazard insurance policies include coverage for replacement of personal property, temporary housing, and other transition expenses. If a mortgagee receives funds from a hazard insurance company for coverage of a mortgagor’s personal property, temporary housing, and other transition expenses, then the mortgagee must promptly release such proceeds to the mortgagor. The mortgagee may not withhold disbursement of such proceeds to cover an existing arrearage without the written consent of the mortgagor.

Except for proceeds pertaining to replacement of personal property, temporary housing and other transition expenses, mortgagees are reminded that hazard or flood insurance proceeds are to be distributed in accordance with existing guidance which provides that the repair of a property - pursuant to a certified repair estimate - is the primary purpose for use of such proceeds.

Application of excess hazard or flood insurance proceeds after distribution of funds to the mortgagor for replacement of personal property, temporary housing and other transition expenses, shall only be used to cover arrearages and/or pay down principal if such proceeds:

1. exceed the cost to repair the property as provided in the certified repair estimate or
2. are insufficient to repair the property based upon the certified repair estimate, and the mortgagor is unable to demonstrate that he/she has the funds necessary to cover the additional repair costs.