One Year Later, Lenders Still Facing Fallout from Katrina

Las Vegas-Nearly one year after a series of hurricanes devastated the Gulf Coast, the storms remain a hot topic for servicers who met here recently for the Western States Loan Servicing Conference.

In part, that is because moratoriums on foreclosure are soon scheduled to expire, which means lenders will have to address the delicate topic of foreclosing on properties where families were devastated and displaced by the storms.

In some cases, of course, the homes were totaled by the storms, especially homes affected by Hurricane Katrina. Robert Klein, CEO of Safeguard Properties, described the aftermath of Katrina as "absolutely the most devastating thing that I've seen in my life." His company has inspected 400,000 homes for damage since Hurricane Katrina struck last year.

As the first year of Katrina's impact comes to a close, Mr. Klein said there are some lessons to be learned and some challenges still ahead for the industry.

In some cases, home inspections have found that insurance proceeds have not been used to repair homes, he said. In addition, there have been cases where contractors have allegedly overcharged for work or not performed work that was paid for on a timely basis. In some cases, local homeowners and officials have complained about excessive bids for work.

"It should cause some concerns," he said. "There is a shortage of qualified contractors."

Ron Reitz of GMAC-RFC said there have been cases where insurance proceeds that were supposed to include the mortgage lender as a beneficiary were cashed without the lender's endorsement, either through fraud or because the lender wasn't included on the check. He also said it is sometimes difficult for lenders to obtain information from insurance companies about whether or not a claim has been paid.

Also speaking on the disaster recovery panel, former Louisiana insurance commissioner Robert Wooley said that if lenders observe evidence of price gouging, they should bring that to the attention of state officials.

"If you do see evidence of price gouging, the only way to combat it is to report it," he said.

He said that in the immediate aftermath of Katrina, the biggest problem for homeowners was finding an insurance adjuster who could inspect their property for a claim. Many had to stay as much as a three-hour drive away from New Orleans, in Mobile, Ala., for example, and commute to the city. And many neighborhoods that suffered the most severe damage were not reachable.

That manpower shortage persisted once the waters receded. Because insurance companies had reduced the number of claims offices, many were scrambling to hire independent adjusters, some of whom were not adequately trained.

"The complaint went from, 'I can't find an adjuster' to 'I've seen five adjusters and I still don't have a report yet,'" he said.

Another insurance issue that remains a hot-button issue is whether damage was caused by wind or by water and whether or not it is covered. Mr. Wooley said people are starting to file lawsuits on this issue, sometimes challenging the determination of engineers who have done wind vs. flood analysis of damage.

An expedited claims practice tried by the Federal Emergency Management Agency also ran into problems, sometimes paying claims for amounts substantially in excess of the property's value.

Another possible dispute mortgage servicers will run into regards insurance claims deadlines, he said. Because of the foreclosure moratorium, servicers may not discover damage to a property until after the deadline for filing insurance claims has passed.

With foreclosure moratoriums expiring at the end of August, servicers were preparing to venture into the delicate task of repossessing property from homeowners affected by last year's hurricanes.

But not all hurricane recovery programs have seen widespread acceptance. Leslie Bromer, a HUD servicing executive, said that HUD's mortgage assistance initiative has only been used by 416 FHA customers to date. "I was really anticipating that we'd have greater use of it," she said.

HUD also has held 2,481 real estate-owned properties from sale so they could be occupied by Katrina evacuees rent free for up to 12 months. But as of June 30, 1,950 of them were being occupied.

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