Does the lender's mortgage-impairment/mortgage-interest coverage protect properties in areas outside of the NFIP mandatory-purchase SFHAs (zone A or V)?

Many homes and businesses in the states affected by Hurricanes Katrina, Rita and Wilma were flooded, but were not located in the mandatory-purchase areas. Here, balance-of-perils coverage would respond if the lender purchased this coverage extension. Many carriers that offer mortgage impairment limit flood coverage to properties only where it is federally required and if available through the NFIP.

Does the lender offer loans subject to mortgage insurance and/or loan guarantees?

A natural disaster may result in an inordinate number of delinquencies and foreclosures. If so, is the lender adequately protected if delinquencies are not properly reported? Only some mortgage-impairment policies protect the lender against loss of mortgage insurance and/or guarantees because of failure to follow foreclosure proceedings.

Do the lender's borrowers purchase homeowner's insurance from a local or regional insurance company?

If so, does that insurance company have the financial strength to pay all the claims following a severe natural disaster? Only a limited number of mortgage-impairment/mortgagee's E&O policies will provide protection against the insolvency of a borrower's insurance company.

What percentage of the lender's mortgage loans has tax escrows?

Many policies only offer coverage for the lender's failure to pay taxes, while some protect the lender's interest if a borrower fails to pay real estate taxes. If no tax escrow is maintained, lenders are not responsible for paying taxes and have no protection if their mortgage interest is jeopardized because borrowers fail to pay the taxes.

These are only some of the underlying issues, all of which are insurable if written on a broad-form mortgage-impairment policy. Only a thorough review of a financial institution's mortgage portfolio and its management practices, compared to the current insurance program in place, can answer these questions.

By evaluating and selecting proven resources, it is possible to insure a financial institution's collateral interest against flood losses.

Patrick Small is managing director of Bankers Insurance Service, a division of Aon Underwriting Managers and a leading provider of fidelity bond and E&O coverages tailored to mortgage lenders and investors. The company is committed to the development of niche products within its established specialty book of business and offers a full range of insurance products specifically designed to meet the needs of the mortgage-banking industry. For more, contact Small at (312) 381-3762 or patrick_small@fprsi.com.

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