In the six months since Sandy slammed into the East Coast, many questions are still unanswered for property owners, lenders, mortgage servicers and investors. While some of the hardest hit areas have begun rebuilding, they do so at their own risk since no one, e.g. local authorities, state authorities, FEMA, HUD and the GSEs, has yet to offer a definitive property-by-property assessment of mitigating actions required to ensure these properties qualify for required flood insurance at a reasonable premium. As a result, property owners and lenders are making their own decisions. On my block of the Jersey Shore, some property owners have lifted their homes as high as 16 feet. Some, who have the money, simply repaired the damage but have not taken any other steps to mitigate future risk. Yet, other homes and businesses sit abandoned as their owners wait for aid and/or a conclusive answer as to the actions required to have an insurable property that qualifies for future mortgage financing.
While this situation is creating enormous stress for homeowners, it also represents significant risk for lenders and servicers. What does a lender do when asked to refinance a home in a stricken or flood-prone area? While an appraisal will reveal unrepaired damage, and the flood certification will reveal if the home is in a flood zone, how does the lender assess its real risk? To date, the premiums on existing flood insurance policies have not been adjusted to reflect new risks – and new flood insurance applications are still being accepted based on pre-Sandy flood maps. While these premiums are still very affordable, how will the lender assess if the borrower can afford required future mortgage insurance once premiums have been adjusted?
The recently published CFPB rules regarding qualified mortgages make this liability even more onerous on lenders. The CFPB amended Regulation Z, which implements the Truth in Lending Act (TILA). The final rule implements sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which generally requires creditors to make a reasonable, good-faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling and establishes certain protections from liability under this requirement for “qualified mortgages.” Most lenders are unwilling to make a loan that does not meet the qualified mortgage parameters yet how can a lender assess the borrower’s ability to repay if insurance costs can skyrocket in the near future?
The situation continues to evolve and until it does there is no easy or absolute answer on how lenders can protect themselves. In the meantime, lenders can begin helping themselves by bringing this issue to the attention of the CFPB.