Mortgage servicers' control over insurance proceeds for homes damaged by hurricanes Katrina and Rita has sparked complaints.
Last week Louisiana Attorney General Charles Foti announced a probe into servicers' handling of the funds. (Homeowners insurance proceeds usually are jointly payable to individuals and their lenders, with loan servicers receiving the money initially.)
In a press release Thursday, Mr. Foti said his office subpoenaed Countrywide Financial Corp., which some consumers complained "is withholding or is slow in forwarding the proceeds" owed. He claimed one borrower had to spend $50,000 of his own money on repairs while Countrywide sat on more than $100,000 from the insurer.
Countrywide acknowledged in a statement e-mailed to the press that "the high volume of insurance claim checks overwhelmed the normal evaluation and disbursement systems of many mortgage servicers, including Countrywide." As a result, some customers faced "unfortunate and unusual delays" to insurance payouts of "several weeks."
But the company said it had "promptly responded by increasing staff, streamlining procedures, and providing increased training to our customer-service representatives." It said it has "now successfully eliminated the backlog."
Other post-Katrina complaints relate to borrowers' need to immediately catch up on payments missed during forbearance unless they seek more flexibility. Some borrowers have also complained that servicers told them that prepayment penalties would still apply.
Mr. Foti also said he would look into prepay penalties, though he was not sure if they are indeed being charged. Most servicers say they are waiving them.
In an interview Friday, Darin Domingue, the deputy chief examiner at the Louisiana Office of Financial Institutions, said the "majority" of consumer complaints it is sorting through concern the pace of insurance disbursements and what borrowers must do to get them. Many earlier complaints were simply about lenders being co-payees, he said.
Mr. Domingue said he thought bottlenecks, rather than malfeasance, caused the delays. Some borrowers can quickly retire loans with insurance funds, he noted, but "if they want to repair the property, the lender does have the right to ensure that the property is repaired with those funds, because that's their collateral."
That was more lender-friendly than what Mr. Domingue told American Banker the week before: That though his department has received few complaints about prepayment penalties, it has found case law it believes it could use to help void the fees if more people complain.
Investors give third-party servicers varying degrees of discretion over the amount and timing of insurance payouts and what they may ask borrower to do to get them. Sometimes servicers must get property inspections or repair-cost estimates or require that a check name a contractor as a co-payee. Like construction loans, insurance proceeds may be doled out as repairs are made.
For delinquent loans or heavily damaged properties, investors in mortgage securities typically require more caution. Often they permit the release of only small sums until the servicer knows what repairs are planned.
In an October list of "frequently asked questions" on Katrina and Rita, Fannie Mae reminded its servicers: "In all instances, the servicer must manage the process for the disposition of insurance proceeds in a manner that ensures that the repairs are completed."
