8/2/2011 6:20 PM ET|
Pay mortgage if house is destroyed?
If a natural disaster leaves your home in ruins, your first impulse probably isn't to give your lender a call. Here's why it needs to be a priority.
The federal government has declared more than 50 official natural disaster areas so far in 2011. Last year, the total of large-scale floods, tornadoes, hurricanes and the like climbed to 81. Few states are immune to natural disasters, and each event affects thousands of homeowners who must cope with the physical and emotional damage, as well as the prospect of perhaps not being able to manage their mortgage payments.
Still, a disaster does not guarantee mortgage relief, according to Laura Vinton, counseling manager at Hope Enterprise, a nonprofit community development financial institution in Gulfport, Miss., a town devastated by Hurricane Katrina in 2005. "Any consideration is determined case by case, and it's a two-way process," she says.
Lenders get guidelines but don't have to follow them
After a disaster, banking regulators and government mortgage agencies typically issue proclamations directing lenders and loan servicers to make certain accommodations for borrowers. But those proclamations are only guidelines.
A May 25 Financial Institution Letter issued by the Federal Deposit Insurance Corp., for instance, declares: "Extending repayment terms, restructuring existing loans, or easing terms for new loans, if done in a manner consistent with sound banking practices, can contribute to the health of the community and serve the long-term interests of the lending institution."
Lenders must stay within regulators' parameters and agencies' loan-servicing guidelines, says Bob Davis, executive vice president of the American Bankers Association in Washington, D.C., though they still have latitude to consider borrowers' individual situations. For some, that might mean a longer period of forbearance or more flexible payment plan.
Mortgage relief you can expect after a disaster
The Federal Housing Administration traditionally imposes a 90-day moratorium on foreclosures of FHA-insured loans in a disaster area. This freeze, triggered by an official declaration by the current president at the time of the disaster, gives the homeowner "a little more time" to work with the lender and insurance carrier to assess the damage and understand the situation, says Karol Mason of Wells Fargo Home Mortgage.
Those who still need help after the 90 days are over can try to negotiate additional relief.
"If the customer still needs assistance and hasn't been making the payments for the 90 days, that workout continues on an individual basis," Mason explains.
Mortgage relief for tornado victims
After the devastating tornadoes in the South this year, Freddie Mac released a press release strongly encouraging servicers to help affected borrowers with Freddie Mac-owned loans by:
- Suspending foreclosure and eviction proceedings for up to 12 months.
- Waiving assessments of penalties or late fees against borrowers with disaster-damaged homes.
- Not reporting forbearance or delinquencies caused by the disaster to the nation's credit bureaus.
What happens when relief runs out?
Lenders typically will waive late fees and defer payments after a disaster, but those accommodations may not last beyond a few months. When the time is up, missed payments become due, either in a lump sum or according to a payment plan.
Any homeowner who suffers a financial setback, such as a job loss, as a direct result of a disaster, also may be offered temporary mortgage relief, even if his or her home was spared. Documentation will likely be required to prove the hardship.
Borrowers should contact their lenders as soon as possible after a disaster, Mason suggests. "It's that customer call that triggers all the actions that take place on our side," she explains.
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