JAN 28, 2013

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Compliance Matters

Avoiding Fire Insurance Problems and Other News

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Periodically, I read new legal case updates and keep seeing a definite trend when it comes to homeowners insurance. The cases all relate to what happens when there is a fire and the house was unoccupied or vacant. This happens a lot, especially when someone dies or moves to a nursing home. Probably all homeowners insurance policies provide that, if the house is vacant or unoccupied for a period of time—usually 30 days—and there is a fire or other loss, then the insurer has no liability.

The most recent case I read was where someone was making repairs to a home they recently bought. Maybe they slept on the floor, who knows? There was a fire and a substantial loss. The insurer does not want to pay relying on the unoccupied or vacant provision in the policy. The case I read was really about a procedural issue related to the case and not a final determination. However, all the other cases I have read have one thing in common: the insurance company always wins.

So what happens if the house burns down or pipes burst in the cold and the home was unoccupied for over 30 days and there is a mortgage on the property?

Think about it. Borrowers just lost their home and there will be no insurance money. They need to find a new place to live. What about the mortgage payments on the house that just burned down? They would probably not be in a hurry to make those payments. After all, there are a lot of people in foreclosure who do not make mortgage payments and they actually have a house to live in.

The solution to the problem of insuring a home that is vacant or unoccupied is to get a different type of insurance policy that covers this situation. They do exist. They do cost more. Homeowners get what they pay for. If you are a mortgage broker you should give your customers a heads up to this situation. Someday, someone will thank you.

Speaking of foreclosure, Michigan has just extended to June 30 its residential mortgage loan modification program originally enacted in 2009. This law was designed to protect consumers and encourage effective communications between lenders and borrowers that could hopefully lead to mortgage loan modifications. The law effectively stopped a foreclosure for 90 days if a borrower requested a meeting with their lender to try and work out a loan modification.

Another aspect of the state law is that if a loan modification could not be worked out with a borrower then the lender has to proceed with a judicial foreclosure instead of a foreclosure by advertisement. The judicial foreclosure takes a lot longer and is essentially a stick, as opposed to a carrot, to encourage lenders to try and work out a loan modification.

According to a July 2012 survey of housing counselors and legal service attorneys by the Michigan Foreclosure Task Force, 60% cited an increase in the previous 12 months in the proportion of their clients who were able to prevent foreclosure through negotiations with their lenders. The 2009 law may also have factored into the reduction of the number of annual foreclosures in MI. The task force cited 416,000 foreclosures in Michigan between 2005 and 2010. Since 2010 the average is 60,000 per year or, by my math, a 25% reduction.

According to a nonpartisan Michigan Senate analysis, one of the factors for extending the law for another six months until June 30 was to see what final rules the Consumer Financial Protection Bureau would come up with in this area. This way Michigan will have time to adjust its foreclosure prevention law so lenders and servicers would not have to deal with different federal and state regulations.

Based in Chelsea, Mich., John McDermott is a real estate and elder care attorney who represents both consumers and businesses. He can be emailed at jamcd@comcast.net.

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