Last year at this time did you expect the major changes on Wall Street or the massive intervention in the markets by the federal government? Everyone knows someone who has been affected, and many are blaming careless risk-taking and poor lending practices in the home mortgage market.
When mortgages became delinquent or went into foreclosure, huge exposures and “toxic assets” resulted. The effects of the housing crisis spread to almost all companies, industries, and sectors—some with disastrous effects and some with only collateral damage. Banks are being bailed out, the automobile industry teeters on collapse and icons of American business have failed.
A persistent factor affecting property policyholders and their claims adjustors is foreclosure. In 2007, before the meltdown, the housing industry saw 10.3 of 1000 homes go into foreclosure. Rick Sharga, senior vice president of Realty Trac, the leading online foreclosure expert, expects this will continue into 2009, noting that one in every 54 homes received a foreclosure notice during the past year. Even with all the moratoria on foreclosures and the mortgage relief by the government, December 2008 was a record month for foreclosures at a staggering 41% increase over just one year before. In total, 2008 foreclosures were up 81% over 2007 and 225% over 2006, with geography and demographics playing a factor in the statistics. Nevada, Florida, and Arizona lead the states in the number of foreclosures, with Nevada topping the list with a 125% increase over 2007.
So what does all this mean to the temporary housing market and an adjuster’s ability to deliver quality service to the policyholder? It means that policyholders may find themselves in tenuous circumstances where the proverbial rug may be pulled out from under them any day by a foreclosure. In addition to the normal victims of property loss who need temporary housing, now many former homeowners are renters—or would-be renters—which means those trying to rent or find accommodations due to property disasters may find shortages of temporary housing.
The deluge of foreclosures can impact an adjuster’s delivery of services to the policyholder in the following ways:
1. Policyholders may be told to leave foreclosed temporary housing.
Chip Cummings, author of Mortgage Myths, says that over 20% of all foreclosures are rental properties. This means that two out of every 10 of your policyholders already in temporary housing could be at high risk of having their rental foreclosed.
When a foreclosure takes place, the tenants in the property have little or no rights, and what rights exist vary state by state. The bottom line is that a new property owner can evict a tenant within a matter of days even though these same tenants have a contract of lease in place with the former landlord. Trusting tenants have no idea if, or when, they may receive an eviction notice from the landlord’s bank.
2. Your temporarily housed insureds may be at greater risk from arson.
“Desperate times cause decent people to do desperate things,” says Joe Toscano of the International Association of Arson Investigators.
David Rioux, vice president of Corporate Security and Investigative Services for Erie Insurance, explains the plight of one desperado: “One example is a gentleman in northwestern Pennsylvania with a suspicious home fire. Despite a checkered credit history, the homeowner was able to eventually secure refinancing last year with an adjustable-rate mortgage at an attractive 6.5% rate. Prior to the fire, the homeowner was notified of a rate change to 15.5%….”
Many of us have heard similar tales from carriers across the country and now see arson investigations on the rise. Not only does this affect the house, but it means that your policyholder who is temporarily housed in an arson-risk or arson-affected property has elevated risks.
3. There’s ample temporary housing but…with a catch.
On the bright side, there are more cost-effective housing offerings due to the increased inventory. This competitive rental market, at all price points, means there is ample availability of properties.
But, even in the bright spot, there are cautions. Because erstwhile homeowners are now going into apartments, the apartment waiting lists are filling up. This is preventing some current policyholders who are lodged in apartments to be denied lease extensions because someone new is already slated to occupy the property. This means that it is critical that you have a housing vendor that manages the process for the entire stay.
4. Beware of credit issues.
In these tough economic times, fewer and fewer individuals have credit cards with available credit for use during a claim. We have seen a severe need to place policyholders in hotels via an alternative method of payment since few policyholders can put hotels on their credit cards any longer.
Every adjuster needs to be aware of potential pitfalls and have a plan on how to handle them before policyholders are affected.
An ounce of prevention. Prepare for the problem before the renter moves into the home. Ask your housing provider to check if there is a pre-foreclosure action pending and to do credit checks on potential landlords. The fees associated with this step are minuscule compared to the cost of another relocation. Never let your policyholder pay rent to the landlord in advance without seeing a current mortgage statement.
Handling a foreclosure during a claim. Know how you will handle the situation if the temporary housing you’ve placed your client in goes into foreclosure. Your policyholder may be legally required to continue to pay rent to the current owner, but look into the legality of having them pay rent into an escrow account. They should also contact an attorney who specializes in foreclosure property issues. Have your housing company contact the bank to see if they can continue to stay through the claim duration.
Every adjuster knows how to handle suspected arson. Engage your investigative unit and put the policyholder in a hotel until the cause is determined.
Although housing options are abundant, there are still policyholders who are moving into apartment rentals. A few years ago, it would have been easy to extend a lease. Now, however, it may be necessary to negotiate that upfront. Be sure your housing provider has done that, and let the lessor know as early as possible when an extension is needed. Additionally, insist that your contractors guarantee a completion date.
Advancing money or direct billing for a hotel may not always be the easiest or most timely solution if the policyholder is in need of a room at 2 a.m. Choose a housing provider that can put the hotel on its card and invoice you later.
With the complexities facing adjusters, and insurers, in general, these days, housing risk mitigation programs can be a valuable aid. Providers of these services can do upfront work, such as checking for pre-foreclosure actions and negotiating potential lease extensions prior to your placement of an insured in temporary housing. They can also guide the insurer through the process of dealing with a foreclosed temporary unit. Some offer a hotel program that puts policyholder stays on a company credit card
Ask your housing vendor what programs it has in place for situations facing policyholders in today’s shaky market, and make sure your provider is asking the right questions of landlords upfront to mitigate your company’s and your policyholders’ risk.