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(from LendersNews, November 2011)

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…

  1. Rarely, if ever, go to foreclosure
     
  2. Almost never result in loss, due to uninsured physical damage (i.e. a fire) to the collateral property
     
  3. Have floating balances, making it hard to monitor, or later force place, for the proper amount of insurance
     
  4. Do not command the high level of insurance documentation as do 1st mortgages (from insurance carriers and agents).
     
  5. 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.

  1. internal tracking (in-house administration)
  2. 3rd party tracking (outsourcing)
  3. no procedure (also known as self insuring)
  4. blanket insurance policy
  5. 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 costcomplete 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.

 

Lenders Financial Insurance Services
(248) 689-2001
(800) 458-1875 toll free
(248) 689-2831 (fax)