Checking for Insurance
on Your
Equity Loans?
While equity lending has been a boon for
lenders, the administration (
servicing) of
equity loans - for insurance compliance - can
be challenging.
As a mortgage loan, insurance
coverage should be maintained at all times, in
order to protect the lender's interest.
But equity loans, with many lenders, are originated and
serviced in the installment loan department,
which are not set up for escrows, and other "1st
mortgage" needs.
Thus, for insurance purposes, it's like
fitting a square peg into a round hole.
In addition to compliance, there is always the issue of cost.
Lenders
have several options - with differing
complexities and costs - to
ensure proper due diligence and insurance compliance.
Equity Loans – What is the Actual Risk?
Consider that equity loans…
- Rarely, if ever, go to foreclosure
- Almost never result in loss, due to
uninsured physical damage (i.e. a fire) to the
collateral property
- Have floating balances, making it hard to
monitor, or later force place, for the proper
amount of insurance
- Do not command the high level of insurance
documentation as do 1st mortgages (from
insurance carriers and agents).
- Might possibly be simultaneously tracked by
another lender - the first
mortgagee. A duplication of procedure
Equity loans do then present risk to the lender,
albeit
risk that is extremely low, and certainly not
equal to the average 1st
mortgage.
Solution Options For Lenders
Lenders currently
have several different options, for
maintaining insurance due diligence and
compliance on their equity loans.
- internal
tracking (in-house administration)
- 3rd party
tracking (outsourcing)
- no
procedure (also known as self insuring)
- blanket
insurance
policy
- endorsement
to the mortgage impairment policy
( #5 ) Endorsement
to The Mortgage Impairment Policy
This option is the least known or understood
solution.
And, many, but not
all, mortgage impairment policies offer this
endorsement. Yet, where available, it offers the best
combination of low cost, complete
portfolio coverage, and no
administration.
Here's how it
works. A mortgage impairment policy provides
"impairment" coverage for all mortgage
loans. This includes equity loans. However, the
mortgage impairment
policy always requires the lender to have
in place basic due
diligence procedures (e.g. force
placing, when a lapse of the
borrower's insurance is known.)
The
Elimination of Checking for Equity Loans
Endorsement removes those
requirements for equity loans, and the lender no
longer has risk to it's interest, of uninsured
damage, for the equity loan property.
The premium
is surprisingly low because it's a smallpart
part of the larger mortgage impairment policy.
Blanket Insurance Policy vs. Mortgage Impairment
Policy Endorsment
(A comparison
between # 4 and # 5 above.)
These are two
unique and different insurance solutions… in
effect, two different paths towards the same
goal.
1)
Blanket Insurance
- Maintains regulatory compliance for the
financial institution
- As with regular force placed insurance,
this pays for damage to the borrower’s
property.
- Borrower
must notify the lender of the damage (Lender
in this case is the 2nd mortgagee)
- Damage must
be in excess of borrower's insurance and/or
1st mortgagee's (force placed) coverage, for
a claim to exist.
- Claims are
very rare, but compliance is met
- Cost is
usually lower than cost of internal
tracking
2) Mortgage
Impairment Endorsement ("Elimination of Checking
Endorsement")
- Maintains regulatory compliance for the
financial institution
- Attached to the larger mortgage impairment
policy - cost is low
Covers financial loss to the lending
institution (for its 2nd position collateral
interest)
- Claims are extremely rare, but
compliance is met
- Cost is usually about 80% less than cost
of blanket insurance.
SUMMARY
Lenders can
eliminate the cost of tracking insurance
policies for their equity loans, by eliminating
the tracking (and force placing) procedure,
whether internal, or by 3rd party - through the
use of insurance policies designed to cover the
entire portfolio. Regulatory compliance is
maintained, and risk is completely eliminated.