Part 1 of 3: Your guide to advocating for your "Forced Mortgage Payoff" with your state using current policy, guidance related to the program you are seeking disaster relief from.
Because I live in Louisiana I'll be using 3 years of researching the state of Louisiana and offer you the same information that others have used to be successful at removing the NFIP (Flood Insurance) DOB from your HUD CDBG-DR Grant Calculations.
Background: June 24, 2011 resource: 1980-083.
"Some applicants may receive insurance proceeds and their bank or mortgage holder may require the total mortgage be paid in full. This is known as a forced payoff, possibly leaving the applicant with an unmet need or unable to repair their home."
Above is a snip from the 2011 resource that the state actually follows. The state of Louisiana has followed this FEMA policy since Katrina. The state of Louisiana requires the words "Forced Mortgage Payoff" to be in the letter. But, it has been documented that some homeowners were not required to have the words, "Forced Mortgage Payoff" and were only required to provide proof that the homeowner was not in control of the NFIP Insurance money. This is where our states issue begins and your required effort to get this forced mortgage payoff waiver so your flood insurance is not counted as a Duplication of Benefits (DOB).
"The applicant would need to submit a letter from either the lender or insurer advising that the payoff was required and not optional."
In the FEMA resource FEMA is requiring the applicant to provide a letter from the mortgage servicer. This is not a banking industry policy nor do banks have to provide such a letter even when asked. The banks will follow their policies regarding a mortgage payoff with insurance funds. This may be a simple phone conversation where a call center support agent acting on behalf of the mortgage holder which an be any number of companies or federal loans secured by Fannie Mae, Freddie Mac, FHA, USDA, etc.
We have published sample letters that were collected over the years from different mortgage servicers. We have found some banks refuse to provide "Forced Mortgage Payoff" letters and refused to put on their letterhead that they will not provide any such letter. At this point the homeowner has to research who actually holds the mortgage and research what federal policies their mortgage lender follows.
On the front line, the call center, the mortgage center you call for information about your mortgage as a "Standard Operating Procedure" (SOP) and specific training for disaster mortgage payoffs. Your call center representative (servicer) will not offer to send you a copy of their SOP. They will be very nice with you and work their wording to make you feel as if they are working in your best interest.
When you received your NFIP Flood Insurance Check from your NFIP broker you were instructed to sign the check then forward it to your mortgage holder for their signature. It's at this point you lost all control, a 2-party check which you had to sign first and send to your bank. Your bank at this point had options. Your bank was sent a copy of the damage report, they know the condition of your home. If not, they would have sent someone out to inspect your home. It's at this point the bank puts in motion the act of paying off your mortgage or working with you to reconstruct or repair your home.
Let's say you had a mortgage of $150,000 and your flood insurance was for $100,000. Your home was determined by FEMA as Substantially Damaged and your local municipal agreed and condemned your home. You now are required to reconstruct the home after you demolish your home. Even if it was not substantially damaged and you were not condemned the servicer of your mortgage could evaluate the market value of your home and make the determination that it would be a risk to allow the mortgage to remain on the home. One risk title is called, "A risk of ownership change." This means the mortgage servicer determines the loan that was secured by the structure is at risk of ownership changing meaning it could default and the lender would be the new owner. At this point, according to policies the bank could enact it's force mortgage payoff policy which actually isn't called "Forced Mortgage Payoff" it might be called "At Risk of Ownership Change".
The servicer is trained to not go to the level of At Risk of Ownership Change because it would require the lender to follow basic federal banking policies. So the servicers of your loan work with you by letter, email and by phone to get you to agree the best method and best approach is to simply pay off your mortgage with the insurance. The servicer never actually informs homeowners that once this is done the home value, the structure or lack of if you demolished the home has no credit or security value. You now can get a new loan for a new construction if your credit is good and you have assists to secure the loan like a builder that will take all financial responsibility until the new home is completely built so a lender could then offer a full mortgage on the market value less their quick sale calculations.
There are more paths the banks can take that I'll not get into at this time in this first post. But I will explain why this policy by FEMA is so widely used by state governments.
FEMA and the SBA work in concert together and this was what our US Congress strengthened when the NFIP was technically bankrupted. FEMA's policy is to have homeowners apply for repair loans so they can cover the debt burden of the disaster recovery and not the American Taxpayers. This method of thinking was to allow those that wanted to recovery quickly an option to secure loans from the SBA that were secured by federal tax dollars to the lenders. Most of your lenders are the same lenders that would have offered you a mortgage. It's a matter of trust, after a disaster, the banking industry typically doesn't jump in to help by lending people money to recover from a disaster. The banks sit back waiting for someone to say "Your investment is secured by the Federal Government 100%." otherwise the banks offer those that have perfect credit, collateral and income. (List of SBA loan lenders top 100)
Let's recap, after your disaster your home is inspected. If your home is 50% or more damaged you may have to demolish it and reconstruct. Once your lender learns that you are going to demolish the home they may ask you a couple of questions or they may simply jump right in with a smooth conversation to have you agree to allow them to apply your insurance money to the unpaid balance of your mortgage.
Technically they are to ask you questions like:
- Do you plan on rebuilding your home to equal or greater value?
- Do you plan on building your new home the same size or larger?
- Do you have a builder that will front all the building costs so your mortgage can be applied to the new home after construction is finished?
Basically your loan servicer was to ask you questions about your new construction and offer you solutions that would allow you to reach your goals. But the servicers don't have to do this when they know that FEMA allows you to go back to the SBA for a government secured loan from the same lenders.
So now that you know the basics and where it all began, (FEMA, SBA, Congress) you know that FEMA Grants are something no one really talks about much when it comes to reconstructing a condemned home.
You then discover HUD CDBG-DR Long Term Disaster Recovery programs. Most states make up soft names for them like, "NC Rebuild", "TX Rebuilds", "Restore Louisiana", "Road Home", all names the states administrative branch comes up with to make it easier to remember but they are all funded by HUD under the Community Development Block Grant programs specific to Disaster Recovery (CDBG-DR).
Since 2011 states have used the "Forced Mortgage Payoff" approach that FEMA published. But what's worse is HUD Training also included the wording even when HUD had no real clear policy on forced mortgage payoffs. CFI trainers who are the official contractors for HUD would talk about a Forced Mortgage Payoff letter as FEMA describes. I believe the 2016 online webinar actually starts to reference what to do about the Forced Mortgage Payoff but then suddenly both trainers go off track and never return to the subject of a force mortgage payoff.
Let's fast forward to 2019 when HUD noticed a problem with states and the handling of the Forced Mortgage Payoff issue.
From research on banking policies we find banks follow the following rule: "...insurance proceeds will be applied to the restoration of the property as long as the restoration and repair are "economically feasible" and the lender's "security is not lessened." If the repairs do not satisfy both conditions, then the security instrument directs the lender to apply the insurance proceeds to the debt. " (Full Article posted here.)
It's time to assign you your first task.
Following HUD Guidance June 20, 2019 as published in the Federal Register: "Funds are not available to an applicant if the applicant does not have legal control of the funds when they are received."
Your 2-party check that you had to sign first then send to your mortgage servicer is what you are focusing on. At the time you sent the check, you had no legal control of the check. According to federal banking policies your mortgage holder could apply the check to the remaining balance of your loan without consulting you. You also could have been advised on the different methods the lender could work with. All of which would be in the best interest of the lender and making sure the structure and it's value was secured by other assists, credit or insurance payments.
The state of Louisiana in Action Plan Amendment 12 makes not that they are following HUD Guidance from June 20, 2019 and is documented in the first page of APA 12.
Published in the header of APA 12: Federal Register Docket No. FR-5989-N-01, FR-6012-N-01 and FR-6039-N-01, FR-6136-N-01, FR-6169-N-01, FR-6169-N-02 .
Now this is where your state like our state of Louisiana uses their department of administration lawyers and outsourced communications companies to avoid publishing helpful information that would come to your forced mortgage payoff aid.
In Louisiana's APA 12 you will find this.
"FEMA National Flood Insurance Program (NFIP) Insurance
Exception: Insurance proceeds taken by a mortgage company as a forced mortgage payoff will not be counted as a duplication of benefits as long as documentation from the mortgage company evidences the payoff was involuntary. The applicant will need to provide a letter from the lender on company letterhead stating that the mortgage payment was force paid or involuntarily paid directly from the insurance company to the lender."
That is the FEMA policy of 2011.
You will also notice that the state of Louisiana never did publish what HUD approved in APA 12. The state of Louisiana continues to publish the full APA 12 as it was submitted to HUD for approval but never updated what was approved or not approved. The state of Louisiana OCD-DRU simply added " *Partially APPROVED BY HUD: October 11, 2019".
The state didn't remove the "FEMA Forced Mortgage Payoff" policy that was updated in the HUD Guidance June 20, 2019. The state never spent the time editing what HUD approved and what HUD didn't approve. Just like the SBA DOB Hardships, the state has them listed in APA 12 but HUD found all of them as "Ineligible Activities" but again, the state of Louisiana doesn't inform it's citizens of this fact. You have to read another document published by HUD to the states Department of Administration. (Read more about SBA DOB Hardships here.)
Now that you know the full backstory and what the state did to not inform you of your options let's get to your first email to the states DOA office and the states Legal Departments. You'll also need to send the same email to each legal team for sub-contractors that are involved with the management of the states long term recovery program offered by HUD CDBG-DR and funded by American Tax dollars.
-----EMAIL TO SEND----- to your state HUD CDBG-DR managers
SUBJECT: HUD Guidance June 20, 2019 FR-6169-N-02 NFIP funds not available to applicant.
When referencing HUD's newly published guidance it appears that the FEMA policy in APA 12 and in the Louisiana Homeowners Assistance Manual are no longer valid with regards to requiring the homeowner to secure a letter from the mortgage servicer referencing the words or implying that the mortgage was a "Force Mortgage Payoff".
In our case our mortgage servicer refused to provide us with a letter that has the words "Forced Mortgage Payoff". The mortgage servicer is only offering a copy of the mortgage payoff letter which appears to be a standard form letter and does not reference a reason for the payoff.
According to HUD Guidance June 20, 2019 and as published in the federal register FR-6169-N-02 I am only required to provide proof that I was not in control of my NFIP insurance funds at the time it was applied to my mortgage.
"Funds are not available to an applicant if the applicant does not have legal control of the funds when they are received."
Our mortgage servicer gave us a single option that was not financially feasible. Once our mortgage servicer determined it would be in the best interest of the lender to apply the insurance funds to the unpaid balance of the mortgage we were not offered any other option to have our NFIP funds returned to us. It was at that time the servicer of our mortgage applied our NFIP funds to the unpaid balance of our mortgage.
I would like to point out that APA 12 and the Louisiana Homeowners Assistance Manual both refer to an old out of date FEMA policy that was designed to work in concert with SBA disaster loans. The FEMA policy does not follow the same proof of legal control as published in HUD Guidance June 20, 2019 (FR-6169-N-02).
Would you please advise on the proper method of contesting the states policy using FEMA's "Forced Mortgage Payoff" letter approach. I am prepared to provide an affidavit attesting to when I lost control of our NFIP Insurance proceeds.
[Case Worker Name: Case Work: John Doe]
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This is your first step. In Part 2 of infinity you will file a HUD OIG report about how your state is handling a mortgage payoff.
Don't wait for the morning, evening or afternoon to send this email. Send it now from your registered account email address.
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