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FHA Loan Rules For Hazard and Flood Insurance
Long after Hurricane Sandy hit the east coast, news headlines were popping up everywhere because affected states had counties being declared federal disaster areas. As homeowners began cleaning up the mess left behind by Sandy, the FHA also addressed some serious issues related to insurance claims by FHA borrowers who had storm damage.
A 2012 FHA Mortgagee Letter discusses those issues, concentrating on hazard and flood insurance payments. FHA mortgagee letter 2012-19, "Hazard and Flood Insurance Requirement Reminder" reminds financial institutions about the Department of Housing and Urban Development's "existing servicing procedures" related to "releasing hazard insurance proceeds for damaged properties securing Federal Housing Administration (FHA) insured mortgage loans."
FHA's standard mortgage document requires that the mortgagee-the lender-is named as a "Loss Payee" on the hazard insurance policy issued in connection with an FHA mortgage. According to the FHA, "This requirement helps ensure that hazard insurance proceeds are available to rebuild damaged property." The mortgagee letter adds, "It also protects mortgagees in the event properties cannot be rebuilt and some or all of the insurance proceeds are required to pay off the outstanding loan indebtedness."
What is the critical issue in this portion of the mortgagee letter? Getting insurance payments to those who are owed them, and not keeping or delaying those payments. "Timely receipt of flood and hazard insurance proceeds allows mortgagors to rebuild their homes and provide some stability for their families."
FHA instructs the lender, "Therefore, mortgagees are strongly encouraged to assist mortgagors by: (1) providing copies of hazard insurance policies and information when requested; (2) promptly releasing hazard insurance claim proceeds when a viable repair plan has been approved; and (3) following standard procedures to ensure that hazard insurance claims are filed and settled in an expeditious manner."
According to this guidance, the lender is instructed to promptly release insurance funds when they become available rather than delaying those funds once paid. Let's examine another part of the FHA mortgagee letter which clearly explains what FHA expects the bank to do with this insurance money:
"In addition to repair coverage for damaged properties, some hazard insurance policies include coverage for replacement of personal property, temporary housing, and other transition expenses. If a mortgagee receives funds from a hazard insurance company for coverage of a mortgagor's personal property, temporary housing, and other transition expenses, then the mortgagee must promptly release such proceeds to the mortgagor. The mortgagee may not withhold disbursement of such proceeds to cover an existing arrearage without the written consent of the mortgagor."
If you have questions FHA policy in this area, or feel the policy has not been followed according to the rules as described here, contact the FHA directly at 1-800 CALL FHA.