Is the housing market crisis over?

Since our industry is ancillary to real estate, we as property insurance professionals have a proverbial finger on the economy’s pulse.  Some areas of the state are beginning to show signs of recovery.  One indicator is that banks are selling more of their foreclosed properties.  This is great for distressed markets and homeowners looking to buy a home at less than market value.  It’s also a great thing for the insurance market, right?

It depends.  First let’s take a look at what foreclosures are.  A working definition is: “the process where a lender tries to recover the balance of a loan from a borrower who stopped making payments, forcing the sale of the home that was used as collateral for the loan.”  (Thank you, Wikipedia).  The lender obtains a court order to terminate, or “foreclose” the borrower’s right of redemption and title to the property.

There are two commons types of foreclosure proceedings in the U.S.: judicial foreclosure and power of sale.  Judicial foreclosure involve a court-supervised sale of the property, with proceeds going to satisfy the mortgage and other lienholders.  The lender initiates foreclosure by filing a lis pendens, notice of a pending lawsuit, against the borrower.  Power of sale foreclosures occur without court supervision (and generally process much faster).

Ok.  Now that the boring part is out of the way, let’s look at where we enter the picture.  When you complete a Tower Hill quote, there is a question that cuts to the quick:  “Is the risk a foreclosed property?”  If the client isn’t sure, check your county’s Property Appraiser website to determine who is the current owner of the home.  Bank names are red-blaring lights that you are dealing with a foreclosed property.

For Tower Hill HO3 and DP3 products, the following risks should not be submitted:

–          Risks that are foreclosure purchases, AND

–          The market value of the home is below $100,000 and the Replacement Cost Estimator (RCE) is 200% higher than the market value

If the risk you are quoting meets only one of the above criteria, you can contact your underwriter for a possible exception.  Along with a completed quote in RPM, we will ask for either:

1)      A copy of the pre-purchase home inspection, OR

2)      A current, acceptable 4-point inspection with the required photos

The inspection must indicate that the utilities were on and tested.  Regardless of which inspection is submitted, we also require interior photos of each room.

What is Underwriting looking for in these inspections?  Acceptable risks have been maintained by the bank, possibly for only a short period of vacancy.  The 4-points (plumbing, electrical, HVAC, and roof) are in as good condition as any other for-sale home.  Unacceptable risks have sat vacant and unused for months to years.   The prior owner may have damaged the home before moving out (tearing out copper electrical and plumbing lines, HVAC units, putting holes in the drywall, and more).  If utilities have been turned off for long periods of time, the probability of loss can increase once they are reactivated.  Interior photos show the current condition of the property and may alert you to any hazards.

Hazards.  No, we’re not talking about the Duke Brothers and the General Lee (1980s TV fans will appreciate that reference).  Hazards are conditions that pose a threat to property.  An ungrounded electrical wire is a hazard for a lightning or fire loss.  A missing roof tile is a hazard for a roof leak.  We review inspections and try and identify any hazards that could cause a loss.  For the right risks, we can make exceptions for foreclosed properties.

Agents and underwriters both play a critical economic role in helping banks feel secure in lending money to homeowners.  Conversely, by providing insurance we also help our customers obtain financing for their new home.  Stability.  Good judgement.  The right risks at the right rates.  All part of a day at the Tower.

Brian Hunt, AIC, CPCU

About Brian Hunt, AIC, CPCU

Commercial Underwriter II
Tower Hill Insurance Group

Brian started his insurance career with State Farm in St. Paul, MN, in 1998. In addition to handling property and liability claims, he served as part of the National Catastrophe Team, following tornadoes, hurricanes, and hailstorms across the country. He made several friends named Charley, Frances, Jeanne, Ivan, Wilma, and Katrina. He moved to Florida in 2009 to manage a catastrophe office in Jacksonville, and because of a girl (now wife) his path led him to Gainesville and Tower Hill Insurance. In his free time, Brian is an Ironman triathlete and also enjoys writing about local and national history.