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This article originally appeared in the May 2009 edition of ISO Review.
Feature Story:
Rising Foreclosure Rates Produce Greater Risks for Insurers
by Jim Levendusky, Product Manager, Coverage Verifier Suite, ISO
The housing bubble burst in 2007, and since then the housing market has been in a crisis of historic proportions. Many residents are unable to make payments on their mortgages, including adjustable- and fixed-rate, and home equity loans. The economic downturn has resulted in increased unemployment, meaning even more families are unable to pay their mortgages. In addition, housing prices have declined, creating a situation in which millions of homeowners are “underwater,” owing more on their mortgages than their homes are worth. That combination of factors has led to a large spike in home foreclosures and related incidences of fraud. With businesses adversely affected by worsening economic conditions, owner defaults on commercial properties are also on the rise.
Recent foreclosure statistics are sobering. In 2008, 2.3 million properties were in foreclosure, an 81 percent increase over 2007. Banks have repossessed more than 860,000 properties. Millions of homes entering or progressing through the foreclosure process mean new risk exposures for a vast number of properties.
Foreclosures are hitting properties at every property price point all across the United States. The top states experiencing foreclosures are California, Florida, Arizona, Ohio, and Michigan. The industry expects additional waves of defaults to occur as more pools of mortgages reset their rates.
The foreclosure process takes an average of four to six months. Foreclosure begins when a mortgagor fails to make payments. The process then moves through a series of stages, including notice of default, notice of trustee sale, and notice of foreclosure. The final stage is the auction sale of the property or the transfer of deed to the mortgagee. Throughout the process, banks don’t often inform insurers that the property they’re insuring is in foreclosure. While banks may eventually send a notice to the insurance company that they have seized a property, it can be months after the owner has vacated. With so many properties going to auction, only about half of the homes find buyers. The rest tend to remain unoccupied.
When the original owner vacates a property because of foreclosure, the risk of damage can be higher. Homeowners on-site will most likely protect and care for their property. But knowing that a return of the property to the bank is imminent, they may stop upkeep on the property. Vacant properties may attract vandals, are targets for theft, and can be at greater risk for arson. Even water damage is more likely to occur. For example, once the utility company turns off a home’s electricity, a basement sump pump can no longer prevent flooding. Pipes can freeze during winter months and burst when the weather turns warmer. In addition, homeowners who default on their mortgages may vandalize their own properties before vacating or commit arson to collect insurance payments on the property before the bank seizes the home.
One example reported by ABC News involved a Michigan woman who set her home ablaze just three days before foreclosure and planned to cash in on the insurance policy on the home. She was caught and sentenced to 1,000 hours of community service and five years of probation, avoiding jail time only because of her lack of a criminal history.
With the current rise in foreclosure rates, insurers are more concerned than ever about unwittingly insuring properties no longer occupied or cared for by their owners. Nevertheless, many insurers continue to provide coverage on properties without knowing owners have abandoned them.
While claims data is not directly tracked to foreclosed properties, ISO analysis confirms theft losses are on the rise, up more than 20 percent in September to October 2008 compared with the preceding 24 months. Anecdotally, many insurers are experiencing large losses involving properties in foreclosure. Claims Journal reported a dramatic example recently. A California man attempted to set his home on fire, but the house exploded instead. The man, who suffered several injuries in the blast, was arrested and sentenced to nine months in jail.
Insurers are seeking ways to mitigate or manage the risks of insuring properties that have entered into the foreclosure process. Knowing that a property has entered foreclosure is key, and the sooner the better, because as properties move through each successive stage of foreclosure, the risk for claims increases. To find out this information, some insurers are manually checking public records and comparing them to the properties they insure. That process can be very time-intensive, and some insurers who conduct manual checks later discover they missed numerous foreclosed properties.
Other companies are turning to foreclosure-monitoring providers that can check a single property or systematically monitor an insurer’s entire book of business. With monthly monitoring available, insurers can get advance knowledge on which properties have entered foreclosure proceedings and which banks have seized. And as a first alert, monitoring service providers can suggest properties that insurers may wish to investigate further.
When an insurer receives notice that an insured property is in foreclosure, it can order a home inspection. The inspector can advise on the status of owner occupancy and provide information about the property’s condition. Armed with this information, the insurer can work to determine if and when the risk is no longer insurable and, therefore, when it’s time to take appropriate action.
Rising foreclosures are an unfortunate consequence of today’s economic realities, and insurers are compelled to identify and manage the risks of providing coverage on those properties. By manually monitoring public records or relying on a monitoring service, insurers can take steps to mitigate this risk.
ISO offers solutions insurers can use to assess foreclosure risk. For more information on foreclosure monitoring systems, go to CV Foreclosure Alert®.
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