Mortgage Broker

Winter 2014

Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.

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46 | winter 2014 MortgageBroker protectingassets Managing Risk Consider the benefits of mortgage impairment insurance BY KATE RAMSAY MORTGAGE IMPAIRMENT INSURANCE is a little explored type of coverage designed to cover a lender's financial interest when the property has been damaged or destroyed by a covered peril; the insurance that should have been in place by the borrower wasn't or is insufficient; and when the borrower defaults on the loan. Ultimately any lenders' primary asset is the real property on which their loan portfolio is secured. Insuring the lenders' financial interest in that real property, commercial or residential, can be done using Mortgage Impairment Insurance. Most lenders primarily transfer the risk of damage or destruction of their security to a borrower, by requiring the borrower to insure the real property as part of a mortgage. If there is damage or destruction to the insured property, the borrower will have access to funds from the insurance policy to repair or replace the property. So where's the risk for the lender? What if the borrower initially insures the property, but allows that insurance to lapse without the lender's knowledge? Now there are potentially no funds to repair or replace the property and the borrower has no choice but to default on the loan. e lender is le with an impaired mortgage where they will either have to invest their own funds to repair or replace the property so they can sell that property, or in the case of total loss, only the land value remains. e lender therefore suffers a financial loss. One of the ways to reduce such losses is to carry Mortgage Impairment Insurance. is type of insurance will cover a lender's portfolio of loans by insuring some of the following types of loss scenarios: • Fire or water damage to a vacant residence. • Homeowner vandalism – angry homeowners or tenants in the process of vacating a foreclosed property may damage walls, cabinets and bathrooms, or may set fire to the property or leave the taps running; • Water damage which results in mould; • Incomplete renovations affecting the re-sale value of the property; • Marijuana grow operations; • Winterization not performed and water damage as result of frozen pipes bursting; • Catastrophic loss and the borrowers' inability to fund repair to residence. A good example is the recent flooding in Calgary. Losses may result from a single event, such as a single house suffering a fire, or a catastrophic event, in which multiple losses may occur from an insured peril such as a flood or earthquake. e mortgage impairment policy will pay for the total loss of, or reduction in the lender's interest resulting from direct physical loss or damage to the mortgaged property. e physical loss must be caused by a peril insured against under the mortgage impairment policy. e lender will be compensated for the difference between the outstanding mortgage balance and the proceeds of the sale of the property. It is important to note that there is no coverage for the borrower of any kind, including the contents or equity. e lender's financial interest includes the unpaid principal and accrued interest from the date of the borrower's default to the date when the loss is settled. Late charges and penalty interest are not covered. Two coverage elements also found in mortgage impairment coverage are for non-foreclosed properties and foreclosed properties. Non-foreclosed coverage (also sometimes called forced-place coverage) is necessary where a loan is not going into default and the borrower is still paying the mortgage, but the borrower is unable to purchase his or her own insurance coverage. e lender can have their financial interest covered. Again, there is no coverage for the borrower. Foreclosed coverage is designed to protect the lender's financial interest and is necessary where a property is in the foreclosure process and title has been, or is being transferred. Mortgage impairment insurance is an important contingent cover for lenders especially when faced with a risk of default by their borrowers. Mortgage impairment insurance is increasing in significance in an economy where homeowners and businesses are over-leveraged and they cannot weather the negative financial impacts of damage to their mortgaged residences and buildings. e risk of losses becomes even greater in a rising interest rate environment. A borrower may allow their insurance to lapse due to insurance being viewed as another expense item. e frequency and severity of catastrophic weather and natural events seems to be increasing and with these events comes more costly damage and destruction, from which many people, even when insured, cannot recover. Mortgage impairment insurance protects lenders when all other avenues of compensation fail and should form part of a lender's overall insurance program. If you are a mortgage lender and have not considered this type of coverage, this is an important insurance to consider. Borrowers are very unlikely to continue making mortgage payments if there is a significant loss. As a lender, wouldn't you want your financial interests in that property to be protected? n p46-47_Mortgage Impairment.indd 46 14-01-27 11:47 AM

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