When a foreclosed home burns, what happens next?
Wildfires in seven Southern California counties destroyed nearly 1,800 homes last week. Unlike the 2003 fires, these hit at a time when foreclosure activity is at record levels, according to DataQuick Information Systems. To understand how these events relate, we spoke with attorney Les Brown of Howrey’s Global Litigation Group, an expert in insurance coverage disputes based in Los Angeles.
Question: It is a safe assumption that foreclosed homes were among those caught in last week’s wildfires. Who is responsible for maintaining insurance coverage on a foreclosed home?
Answer: The lender is on the hook. When people are making their monthly mortgage payments, very often the insurance premium is wrapped into that payment. But when the homeowner stops making payments, those insurance premiums aren’t being paid. When a property goes into foreclosure, the lender or bank is notified that those insurance payments become their responsibility.
Question: So, at what point is the lender on the hook in the foreclosure process?
Answer: It depends on the situation and when the lender is given a notice, but generally the lender has time to arrange insurance. It is possible some lenders weren’t covered, but it’s unlikely.
Question: Would you say that most of the banks, indeed, carried fire insurance?
Answer: Yes, they have to, because otherwise it would be malpractice.
Question: Could there be a situation in which a lender ends up with an empty piece of land rather than an asset?
Answer: The only way that is possible is if the lender didn’t do its job properly -- for example, if the lender didn’t make the insurance payments. Sometimes people make mistakes, but I can’t think of an instance where that has happened in the past.
Question: So, the lender will just take the insurance money and sell the land?
Answer: It is very unlikely that the lender would invest and add money to construct a home. They are not in the business of building homes.
Question: If a bank-owned home is in or near a fire zone, how can a prospective buyer know whether it, indeed, sustained any damage?
Answer: Brokers are required to disclose fire damage, and a bank will probably go through a broker to sell the property. The only way that I don’t see fire damage being disclosed is if the property is sold through an auction. I suggest hiring an independent inspector who has knowledge of fire damage.
Question: What are the economic impact and reaction that we can we expect to see as a result of the fires?
Answer: Insurance companies will likely raise fire insurance rates significantly, not just on foreclosed homes but on homes in general. That could cause the state government to get involved. There have been insurance pools and sharing agreements in regard to hurricanes in other states. California might be heading to that point with wildfires.