Mortgage Impairment protection is a very powerful but often misunderstood set of coverages for lenders. It was originally designed for loan servicers in order to cover them for a loss that occurred when errors were made in administrative tasks, such as tracking insurance or for loss when something beyond the lender’s control went wrong like a property flooding that was not previously in a flood zone. The policy was considered backup coverage if the borrower did not have a policy that would pay, if the lender made certain errors, or if there were oversights in loan servicing. Mortgage Impairment (MI) is prevalent among financial institutions, however many lenders are unaware of what the policy actually covers, or may have forgotten that they have it and are missing out on valuable claim dollars. When is the last time you reviewed your MI (or E/O section of your package policy)?
With many Mortgage Impairment policies, a claim can only be filed when the value of any collateral on the loan (including land value) is taken into account and foreclosed on. After the sale, if the lender can still show a loss then there is coverage for that loss. Over the years additional coverages have been added as options and there are several different versions of the program now available. One of these versions eliminates the valuation of all collateral and only looks at the damaged structure or actual loss regardless of other collateral value. Some versions still require that you track insurance from inception throughout the life of the loan, while others only require that you send out annual renewal notices to your borrowers. Another version of the policy that's gaining popularity is one that is endorsed to be blanket coverage and eliminates hazard insurance tracking and force placing of insurance altogether. This Blanket Insurance Coverage is available on consumer and mortgage collateral. Click here for a detailed explanation of Blanket Insurance for Lenders.
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Regardless of the version of the policy that is best for you, it may be wise for you to consider a Mortgage Impairment protection plan if you do not currently have one. If your institution does have one in place, it is time to dust it off and review it. One of the criticisms of MI over the years is that the policies tend to be lengthy and confusing, and when it comes to claim processing, keywords in the policy dictate timing, whether or not you'll be paid or how much you'll be paid. Many policies were based off of on a Lloyd's of London model. Today, many are still insured through Lloyd's of London and the policy language is archaic. Make sure to get a full explanation of the verbiage in your existing policy, or a policy you are considering, and find out exactly how claims will be settled when a loss occurs.
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