Economic conditions and ongoing regulatory changes continue to alter the course of the mortgage banking industry. In an ever-evolving time for mortgage professionals, the idea of lender insurance products may be the shelter that many seek. Very few lending institutions can claim that all their borrowers are insured—a huge risk for them. Organizations that provide lender-placed insurance to institutions sell nothing less than peace of mind in a very precarious time.
According to recent statistics from RealtyTrac, an online marketplace for foreclosure properties, foreclosure filings have been on the rise as homebuyers continue to default on mortgage payments. The Web site stated that foreclosure filings were up seven percent since August 2011. According to the report, 228,098 homes in the U.S. received foreclosure filings during that month.
Regulatory changes are also set to establish new standards in terms of compliance and required reporting, adding additional pressure for lenders to more effectively control costs and increase efficiencies in managing their loan production pipelines.
Coping with uncertainty in industry regulations
Lenders remain unclear on what will be required of them in the coming months and years as the full breadth of pending legislation within the Dodd-Frank Wall Street Reform and Consumers Protection Act unfolds. The U.S. federal financial regulation statute could soon alter much of the nation’s financial services industry.
Enacted in July 2010, the Act implements a level of demands on lenders, including changes to borrower disclosure forms. The notification process for lender-placed insurance now includes the provision that two disclosure letters must be sent to the borrower, but it is not yet clear what types of documents will be required or what the subsequent cost to lenders might be.
In general, the burden of identifying the right insurance coverage can be problematic, and resource-strapped lenders may not be positioned to effectively manage this process in-house. Third-party providers can alleviate this pressure on lenders, enabling them to better focus on managing their core competencies—successfully originating and closing loans. Qualified providers can provide coverage to force place insurance properties when a borrower fails to maintain his or her own insurance, whether it be single family residential homes, manufactured homes, condominiums or commercial buildings.
Typically, third-party providers can deliver superior levels of expertise and experience relative to the inner workings of the insurance industry, positioning lenders to more appropriately match individual borrowers with the most appropriate insurance offering for their unique situation.
Through relationships with national insurance carriers and managing general agencies, third-party providers help contain costs for lenders by compiling and providing research of the best insurance options available, and continuing to provide relevant information that enables lenders to maintain the best plan as their business evolves. More often than not, lenders shop much like a typical consumer does—find the insurance plan that meets their immediate needs in the fastest way possible, which often means accepting a product with inadequate coverage or pricing.
Lenders must be aware of required insurance options to reduce risks
Certain types of insurance are strictly regulated by the federal government, such as flood insurance. Even in certain areas with little risk for such disasters, lenders should be prepared to protect their properties. No lender is exempt from the requirements in place to insure every mortgage loan within its portfolio that lies within a Special Flood Hazard Area has coverage in place. In order to guarantee full compliance, governmental and regulatory agencies nationwide are actively auditing lenders.
In many instances, penalties are being imposed for failure to comply. Third-party providers help lenders maintain regulatory compliance through flood programs designed specifically for mortgage servicers. Policy limits can vary from up to $250,000 on residential properties to $500,000 on commercial properties.
Technology also exists that allows for automated flood zone determination, allowing lenders to further improve compliance in a more cost-effective manner. From a simple street address, lenders can now virtually check to see if a property is within a flood zone and receive a Standard Flood Hazard Determination more quickly.
The rise in the number of real estate-owned (REO) properties nationwide presents unique challenges as well. While most insurance carriers will not cover REO properties without also providing lender placed hazard and flood programs, third-party offerings may include plans that are tailored toward “stand alone” REO properties independent of a lender placed program.
Some lenders may seek insurance that covers multiple property types. Blanket Insurance Protection eliminates the need for lenders to track each individual policy, reducing the cost associated with servicing loan portfolios. This type of protection includes hazard coverage for first mortgages, second mortgages, home equity line of credit and condominiums.
Other options may include Vendor Single Interest Insurance, policies which provide lenders with either Named Peril or All Risk physical damage in the event of an uninsured loss. Such a case might occur if a borrower fails to insure their collateral.
Third parties also provide lenders with a unique opportunity for insurance outsourcing. There are outsourcing service providers available for every portfolio, no matter the size. Today’s technology can match lenders with the solution that works best for them from institutions with as few as 1,500 loans to those exceeding one million loans.
Contain costs, improve efficiencies
In uncertain times, lender insurance products provide a safe haven for lenders. Experienced third-party providers can help lenders more accurately evaluate their insurance needs and identify the best plan that matches the individual needs of each lender. As the economy continues to show sluggish rates of recovery, lenders will simply be required to insure property themselves to protect their bottom line.
Larry Cason is president and founder of The IL Group. Founded in 1980, The IL Group is based in Gulf Shores, Ala. The business provides customized lender placed products and services to lending institutions nationwide. For more information, call (251) 968-9888.
