Muddied: Mortgage Bankers Should Rethink Their Response to Disasters

December 3, 2012
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In case you forgot, there was a big hurricane out here in the Northeast last month.

I say “forgot” because while Hurricane Sandy might be out of the headlines today, it remains very much an “active” disaster. I was out on Staten Island yesterday delivering meals to people still trying to get their bearings after the storm. The areas I visited, near the south shore of the island, literally became lakes after the hurricane as homes were completely submerged and cars floated about like fishing bobs.

Even yesterday there remain staging centers on street corners around Staten Island at which hot meals are distributed and people whose homes were devastated could stop by to pick out donated clothing and supplies. There was a constant stream of people visiting the staging center on Midland Avenue yesterday.

I share this with you not to get you to donate or volunteer, both of which are worthwhile endeavors. Rather, I would urge financial institutions, and mortgage lenders in particular, to think about changing their post-disaster policies for the sake of their brands and for the wrecked communities they serve.

More than one disaster victim I spoke with yesterday had particular anger for their mortgage lender. Essentially, the post-disaster lending policies today work like this: the bank gives the borrower a three-month moratorium. At the end of three months, the borrower is expected to pay four months of mortgage payments. There is no abatement of the loan.

In a place like the Midland Beach section of Staten Island, that policy stings. As evidenced by the photo of the home above, many of the properties in this area are not just damaged, butĀ irreparably so. If a mortgage lender is a partner to a borrower, and I think lenders are, then not acknowledging the damage to the core value of a property is akin to sticking a partner with the bill. Staten Island is a hard-scrabble community of blue-collar folks. You should hear what they are saying about lenders with such hard-core policies.Ā (The vitriol for JP Morgan Chase & Co. was particularly dark.)

I am fully aware of the legal ramifications of what I am suggesting, not to mention the secondary market implications. But a better approach is needed. Unfortunately, mortgage lending is not a close-and-done financial transactions. Lenders must associate with borrowers for many long years after the closing. Lenders should do the right thing, especially because it makes long-term sense, and figure out how to take greater account of the demolished values of the homes against which they have lent in areas inundated by disaster. It’s what a true partner would do.

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2 Responses to Muddied: Mortgage Bankers Should Rethink Their Response to Disasters

  1. chriscd on December 3, 2012 at 11:02 am

    Are you suggesting the loan be modified such that less is owed or maybe just re-amortized? I could see the logic behind re-amortizing so that they don’t suddenly have to come up with a ton of cash when they have a lot of damage and repairs to take care of. And of course they would be paying for alternate lodging until their home can be re-built. But, don’t the homeowner’s carry insurance that would cover the majority of those costs?

    • JJ Hornblass on December 3, 2012 at 12:31 pm

      Re-amortimizing seems like a given to me.

      But I would even encourage the consideration of modification. The sentiment on the ground in Staten Island is “walk away.” With the value of the properties so damaged, there is more than one borrower out there who understands that the face value of their mortgage is well in excess of the value of their property. For lenders not to understand that and seek a the full repayment of the mortgage, rather than modification, I believe will end up harming them financially and from a brand perspective in the long run. And this isn’t an issue of moral hazard. This was a hurricane of historical ferocity.

      As I understand it, many insurance companies are not making the borrowers whole. In such cases where a borrower is made whole, of course, the loan should remain as it was before the storm.

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