Natural disasters such as hurricanes, floods, tornadoes and wildfires can wreak havoc on communities, leaving homeowners grappling with property damage and financial hardships.
In recent weeks, we’ve all watched with heavy hearts as Hurricane Helene and then Milton caused widespread destruction across the southeastern U.S.
Along with the physical devastation, natural disasters often lead to a spike in mortgage delinquencies as borrowers face unexpected financial challenges. As note holders, we play a critical role in supporting mortgage borrowers after a disaster. Here are seven essential steps every note holder should take to protect their asset and help borrowers navigate the aftermath of a natural disaster.
Steps for Note Holders After a Natural Disaster
1. Coordinate with Your Loan Servicer
Loan servicing companies are on the front lines when it comes to handling calls and inquiries from borrowers. They may already have a set of procedures including online resources.
We personally own property in Florida and received an email from our mortgage company both before and after the recent hurricanes. Many companies have a Disaster Alert at the top of their site with a link offering assistance. This hurricane resource center is just one example of how servicers can provide helpful resources to borrowers.
As a note holder, you’ll want to get a good understanding of what actions your loan servicer takes automatically, what they will do at your request, and what they would like you as the note holder to handle directly.
2. Proactively Reach Out to Borrowers
One of the most important actions in the wake of a natural disaster is to reach out to borrowers. Homeowners can understandably be overwhelmed by the loss of property, displacement, or other financial pressures and may not know their options.
Reaching out early with empathy and clarity can offer immediate comfort, build trust, and reduce the likelihood of missed payments or confusion.
3. Provide Clear Information on Disaster Assistance
Borrowers may not be aware of the full range of federal and state resources available to them after a disaster. As a note holder, you can guide them to key resources, including:
- FEMA Disaster Assistance – Provides assistance for immediate relief for serious needs along with additional support for temporary housing, rental assistance, home repairs, personal property, transportation, moving, funeral expenses, and more. Register online or call FEMA at 800-621-FEMA (3362).
Note: There’s a lot of misinformation out there on FEMA. Be sure to get information directly from the FEMA.Gov site including What Assistance Does FEMA Provide along with FEMA Myths and Facts and FEMA $750 Rumor. - FEMA Search Tool – Determine areas that have declared disasters for benefit eligibility.
- SBA Disaster Loans – Low-interest loans to help businesses, homeowners, and renters in declared disaster areas with losses not covered by insurance or funding from FEMA
- National Flood Insurance Program – NFIP provides flood insurance to building and coverages as part of FEMA. Existing policy holders can start a claim online. New policies can be purchased for future coverage. It is not required to live in a flood zone to purchase flood insurance.
- State Emergency Management – This government site helps you find your state’s emergency management agency along with resources local in your area.
- Operation Blue Roof – Managed by the U.S. Army Corps of Engineers for the Federal Emergency Management Agency with the purpose to provide homeowners and permanently occupied rental properties with fiber-reinforced sheeting to cover their damaged roofs until permanent repairs can be scheduled.
- American Red Cross – private organization offering disaster assistance
- Salvation Army – private organization offering disaster assistance.
By pointing borrowers to these resources, you can help them receive the aid they need to rebuild.
4. Order an Exterior Property Condition Report (PCR)
After a natural disaster, it’s crucial to assess the condition of the property serving as collateral for the note. Ordering an exterior Property Condition Report (PCR) can help evaluate the property’s status and identify what repairs might be needed.
At a reasonable cost of $50-75, the PCR provides an on-the-ground assessments to help note holders make informed decisions about how to assist the borrower, work with insurance claims, and address potential long-term issues. The loan servicer can assist with ordering or you can use a third-party service like Baldwin Advisory Group.
5. Know Where Insurance Coverage Stands
Home borrowers are required to keep the property insured based on the terms of the note, deed of trust, or mortgage. The note holder is named as an additional insured as a mortgagee/loss payee.
The loan servicer will usually track for current insurance, send notices, or assist with force placed insurance when necessary. It is imperative you’re listed on that policy to be protected when there is a claim.
If there is a claim, the homeowner reaches out the insurance carrier to file a claim. If the loss is covered, an adjuster is assigned. Sadly, it is often a fight to get the insurance company to cover the full costs which leads to legal battles. Another common battle occurs in determining hurricane vs flood damage which is covered under a separate flood insurance policy not all borrowers maintain (more on this later).
When the cost estimate is complete the insurance company issues a check to pay for the repairs. This check is normally made payable to both the homeowner and their lender (or loan servicer). That means the homeowner and the note holder must both sign and endorse the check.
Depending on the loan status and the amount of the claim check, lenders may require additional documentation before endorsing or disbursing. As note holders, we want to be sure the funds are used to make the repairs or pay down the loan depending on the situation. This is where you work closely with the servicer to make these determinations.
6. Consider Offering Mortgage Assistance Plans
When borrowers face income loss or financial strain due to a disaster, offering temporary payment relief can be a lifeline. This may come in the form of forbearance, deferred payments, or other repayment plan to allow borrowers to focus on their immediate recovery.
For borrowers who experience long-term financial challenges, a loan modification could be a solution. Adjusting the terms of the loan — whether by lowering interest rates, extending the loan term, or reducing monthly payments — can make the loan more manageable. A trial period is usually set to be sure the borrower can manage the new repayment terms before finalizing with a permanent loan modification.
In extreme situations, a short sale or deed in lieu of foreclosure (DIL) may be a necessary alternative. A short sale allows the property owner to sell for less than they owe with the note holder approving a discounted payoff.
The DIL involves accepting a deed transferring the property ownership from the borrower to the note holder with the remaining balance forgiven. It’s important to always order a new title report before accepting a DIL to verify if any liens have attached to the property that would impact ownership, clear title or equity.
Both the short sale and the DIL have potential tax consequences to the borrower under loan forgiveness or debt cancellation rules of the IRS.
To determine the best solution, the borrower should complete a mortgage assistance application prior to approval. In addition to knowing the current income, expenses, assets, and liabilities, the request should also include the status of any insurance claims made.
7. Monitor Recovery and Stay Flexible
The effects of natural disasters are often long-lasting, and a borrower’s financial situation may change over time. Note holders should monitor the recovery process and be prepared to extend relief options, such as extending forbearance periods or considering further loan modifications if needed.
By staying flexible and supportive, note holders can help borrowers avoid long-term delinquency or default.
The Impact of Natural Disasters on Mortgage Delinquency
Natural disasters often lead to a sharp rise in missed payments as borrowers face unexpected financial challenges. Housing Wire reported mortgage delinquencies were between 5% to 10% based on research after Hurricanes Harvey, Irma and Ida.
Hurricane Helene alone has potentially exposed $96 billion in unpaid mortgage balances to delinquency. Most of these are in Florida (53%), North Carolina (19%), South Carolina (18%), Georgia (8%) and Virginia (3%). Data is still being compiled on Hurricane Milton with the majority of damage occurring in Florida.
In the same report by Bank of America, an estimated 5% of those mortgage borrowers in impacted areas might become delinquent. The good news is that many of these delinquencies will eventually self-cure within 12 months, as homeowners recover and resume regular payments.
But what about insurance coverage?
While home insurance may cover hurricane and wind damage, most policies exempt coverage for damage by flood. Alarmingly, most homeowners were not insured for flood through the National Flood Insurance Program (NFIP) or private insurers. The same report shows that only 14.2% of homes were covered in the five states affected by Hurricane Helene.
With the widespread devastation, how likely will a borrower continue paying if they can’t live in the home and don’t have money to make expensive repairs? This puts lenders at risk if the value of the collateral goes below the balance of the mortgage.
As costs of insurance, property taxes, and association fees continue to rise homeowners may decide to list a property for sale rather than carry the increased burden.
Managing Notes to Support Mortgage Borrowers
Hurricanes and other natural disasters can cause significant financial strain for homeowners, leading to missed payments and increased mortgage delinquency. However, as a note holder, you can take several steps to provide immediate relief and long-term support. By proactively reaching out to borrowers, assessing property conditions, offering payment relief, and guiding them to disaster resources, you can help homeowners recover and stay on track with their mortgages.
Moreover, by recognizing the likelihood of increased delinquencies following a disaster you can prepare to offer compassionate, flexible solutions that give borrowers the space they need to rebuild their lives. With these seven steps, note holders can foster long-term borrower stability while safeguarding their mortgage investments
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