Hazard Insurance

Last year turned out to be a pretty benign one in terms of the risks that most lenders worry about destroying collateral value. The hurricane season was fairly benign. With the devastating 2005 hurricane season still on the industry's minds, that was a welcome relief. There were no major earthquakes. Lenders still had to manage the usual host of perils, including fires and floods, but for the most part, the patient didn't show any signs of deterioration.

But there's a reason that lenders and investors require property insurance for all the home loans that are made. One easy hurricane season doesn't mean the risk has diminished. In fact, an easy year helps insurers build reserves for the more troubling times.

Just last month, experts from the U.S. Geological Survey predicted that the state of California faces a nearly 50% chance of experiencing an earthquake with a magnitude of 7.5 or higher within the next 30 years. The chance of an earthquake registering 6.7 or higher during that time period is nearly certain, the scientists report.

Flood, fire, wind and shaking earth are constant perils. This Special Report takes a close look at fire risk because while that peril may be more predictable from an actuarial standpoint than natural disasters, some experts believe the risk of arson will rise as a result of falling home and property values. With that in mind, its worth keeping an eye on fire insurance claim trends.

No matter what the season, a variety of hazards threaten the health of the collateral behind mortgage loans. And for that reason, smart servicers have to keep an eye on property insurance coverage. Nobody wants to get e-mailed a photograph of damaged collateral and find out it was uninsured.

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