Tornados whipping through the middle of the country last week left thousands homeless and scores of lenders holding mortgages on piles of rubble.
Nearly 5,000 homes were destroyed in Oklahoma, Kansas, Arkansas, Tennessee, and Texas. Thousands more suffered extensive damage, and homeowners are scrambling to get loans for repairs.
Bank of Oklahoma has the largest share of mortgage loans in Oklahoma County, one of the most devastated areas, according to data from First American Real Estate Solutions, Anaheim, Calif. The bank had $118.1 million of mortgage loans outstanding there last September. American Capital Mortgage was No. 2, with $57.2 million outstanding, and NationsBank was third, with $54.5 million.
"The first thing that happens is, all the rating agencies call up in a panic," said Jack Mayesh, chief executive of Long Beach Mortgage Co., a California lender that has dealt with its share of earthquake-related damage. Defaults and delinquencies can be much higher on properties that have been damaged or destroyed.
A lender's first step is to assess its loan portfolio and determine what percentage could be affected by the storm or earthquake, Mr. Mayesh said. Then lenders send appraisers to affected neighborhoods.
Homeowners, meanwhile, get in touch with their insurance companies. Most lenders require homeowners to have insurance policies before making mortgage loans.
"Tornados are an insurable disaster," said Gary Schmitt, senior vice president of Intrust Bank, Wichita, Kan.
"Usually, the borrower will file an insurance claim, and the insurer will provide a construction loan to rebuild or cut a check for the value of the property," Mr. Schmitt said. "In that case, the customer will bring the check down and pay the loan off," he said.
Proactive lenders, meanwhile, negotiate forbearance agreements with borrowers, Mr. Mayesh said. These agreements let homeowners skip payments while negotiating with their insurers.
Leniency varies by lender. Bank One, for example, lets homeowners go without making payments for up to 90 days, a spokesman said; other lenders allow up to 18 months.
Freddie Mac lets servicers negotiate forbearance terms with homeowners, a spokesman said. "If the servicer gets in touch with us, forbearance can be extended beyond 18 months," he said.
"It's hard to expect somebody to keep up payments when they may be renting and have other expenses," Intrust's Mr. Schmitt said.
If the loans are serviced by an outside party, the lender is generally required to pay the servicer missed payments, said Mr. Mayesh of Long Beach Mortgage.
Mortgage insurers defer to lenders and servicers, said a GE Capital Mortgage spokesman. "We follow the forbearance policies of Fannie, Freddie, and other investors," he said. "It would do the lender or us no good to foreclose on a home that doesn't exist."
Loan-to-value ratio is an important indicator of a loan's riskiness, he said. The more equity homeowners have in their homes, the less likely they are to default.
"If the homeowner has a 125% loan, they'll say, 'Later, see you in Vegas,'" Mr. Mayesh said.
