As servicers try to fulfill HUD requirements for properties in default, they often miss opportunities to repair under insurance policies. We sat down with Patrick Nackley, director of marketing and business development at Superior Home Services, to discuss the ways servicers can maximize the value of settlements.
HousingWire: What have you seen trending in the remediation and conveyance of damaged FHA properties in the last 12 months?
Patricky Nackley: HUD has been very diligent in making sure that servicers file a hazard claim for any perceived insurable damage to a property and that servicers can provide documentation that a claim was filed. This can create a procedural backlog for a lot of servicers where they are simply trying to meet requirements so they file a claim on everything. That actually has an unintended consequence, because if you get money for that claim, the expectation is you’re going to use it to repair the property. Servicers have to be able to document specifically when they took possession of a property, what condition the property was in at that time and the dates of any damage occurrences. This information provides a foundation for whether it is appropriate to file a hazard claim.
HW: How do you help the servicers in this situation?
PN: One way we help servicers is to identify whether or not we are actually looking at an insured peril. If the damage is covered under an insurance policy, we are helping servicers maximize the value of the settlements since these settlements are based on replacement. We don’t want servicers to get shorted on pricing, depreciation, being paid overhead and profit. If you are maximizing the value of each settlement and anticipating using that money to repair, you are reducing the incidents of corporate contribution. That’s where we really provide value to our clients. This is not just a procedural requirement anymore. Now there is scrutiny on whether a servicer filed a hazard claim, and if they did, what did they do with the money? What we’re doing is allowing the servicer to meet the heightened mitigation requirements while using insurance dollars to address the damage at the property.
HW: Many big banks have threatened to exit the FHA-backed loan business because of compliance. How can strategic management of FHA files through default save servicers money in the long run?
PN: One of the issues with compliance is that the requirements are getting so stringent it’s very difficult to meet all of HUD’s expectations within the current expense allowables and not have to contribute a significant amount of corporate money. If servicers obtain dollars under contracts of indemnity, or insurance policies, an expense allowance is not the appropriate standard.
Most insurance policies are replacement policies. There are opportunities to meet regulatory expectations that are incorporated into the hazard claim process, if you think about them programmatically, without having to change what servicers are doing from a compliance standpoint. Many servicers are already filing claims, but they’re not thinking about what benefits are available under an insurance policy. If we use hazard claim money to repair the property and replace the items, servicers will be able to get paid for what was spent.
HW: What kind of difference does this make to your clients?
PN:It makes a difference when they are able to meet compliance expectations and also save the time and expense associated with remediation of the property. In the past, many servicers simply filed the hazard claim, obtained the settlement, and deposited the settlement draft into a restricted escrow account. The money just sat there. Repair options would be considered much later on in the process. We have seen numerous circumstances where repairs are undertaken without any consideration of hazard claim funds sitting in restricted escrow, what those funds covered, and how additional insurance funds could be obtained based on the remediation effort.
Now with a compliance strategy that considers hazard claim filing with repair, you’re actually meeting a number of different regulatory expectations while reducing corporate expense. By obtaining insurance dollars with the intention of repairing the property, you are able to recoup the money you spent. Clients have found it very helpful to have a property where the damage is mitigated without incurring expenses under HUD allowables. And they are happy they can document the compliance efforts. As a vendor we’re not only assisting on the ground, but also providing the documentation necessary to demonstrate that the servicer has met its obligation under HUD regulations. You can do everything right, but if you can’t show that you did, you technically didn’t do everything right.
