Here It Comes… Can Mortgage Lenders Hold Your Insurance Money Hostage if Your Home has been Seriously Damaged or Destroyed?

Can mortgage lenders hold your insurance money hostage?

If your home has been seriously damaged or destroyed, your insurance company will release a check made out to both you and your mortgage lender to pay for the necessary repairs.

“Lenders have a substantial investment in the property, sometimes more than the homeowner, especially if the homeowner has made a small down payment,” says Michael Barry, vice president of media relations for the Insurance Information Institute in New York City. Mortgage lenders have an equal right to the insurance check to ensure repairs are made, says Barry.

Yet, while Michael Northagen, vice president with Wells Fargo Home Mortgage in Minneapolis, Minn., agrees, saying “the desire of the [mortgage] lender is always to have repairs made to a property,” a consumer advocacy group has come out and said otherwise.

A small number of homeowners who lost their homes last year to the wildfires in Bastrop, Texas , reported that their mortgage lenders made them pay down or pay off their mortgage balance with insurance money, instead of applying the funds towards rebuilding.

Insurance money used to pay down mortgages

According to United Policyholders, a consumer advocacy group for insurance customers based in San Francisco, approximately one-third of the homeowners who responded to the group’s post-disaster survey said their lender wanted some or all of their insurance money to be used to reduce their mortgage balance before releasing funds for rebuilding.

“We’re continuing to monitor these complaints and are working with the Texas Attorney General’s investigation,” says Amy Bach, executive director of United Policyholders. “Three homeowners gave us additional information and all three said they were up-to-date on their mortgage payments.”

Bach says one of the homeowners received the remaining balance of the insurance proceeds after her loan balance was paid down, but the other two had their entire insurance check applied to their mortgage. The homes of all three were completely destroyed.

Rest here…

I bet we will be seeing much more of this going forward. Especially in the areas that were affected by hurricane Isaac.


18 Responses to “Here It Comes… Can Mortgage Lenders Hold Your Insurance Money Hostage if Your Home has been Seriously Damaged or Destroyed?”
  1. Bill says:

    The banks “investment” is only your signature on the mortgage that gives them permission to make a book keeping entry equal to the mortgage amount. They don’t go to the vault and pull out depositors money. Then when they hold the insurance proceeds they get to reap the investment income from that.

  2. Steve Asbury says:

    We had a fire in January. We owe less the two years on our house. The bank is prolonging the rebuilding of our house. How much money can they hold on two and what rights do the bank have if we are having no problem with the insurance company?

    • Joanne says:

      Steve, we had no problems with our insurance money, either. The way we saw it was that WE paid the premiums all of these years and Bank of America had no right to hold that money hostage, delaying the progress of repairing our home. The banks feel that THEY own the property. I’m with you…I had more equity in my home than I owed, but they still held that check!
      Here’s the kicker…we just flooded AGAIN and I will have to deal with them a second time. Hoping my nerves can take it.
      All I can suggest is fight, fight , fight. Our governor’s office put some pressure on the bank and a reporter from CNN contacted me. The squeaky wheel gets the grease.
      I wish you the best of luck.

      • Melanie M Whitworth says:

        Joanne: I see that your reply was three years ago so I don’t know if you will get this note, but I am wondering which state you are in and which office state office you contacted for assistance. We lost a home to fire and cannot get Wells Fargo to release the funds to rebuild even though they agreed to to honor the contract we signed and disbursed partial funds.
        Thank you.

  3. Ernest Howe says:

    we had a tornado and the insurance co. sent us the check for repairs they had to be signed by our lender citi mortgage they have kept the checks and said they have a committee that decides when to release the money after repairs. the repairs have been made but the contractor has not been paid. citi mortgage says they have not received notice that the work has been done are holding .citi mortgage has no office in Nebraska . every time I call the 800 number I get a different office. one in ohio, alabama. California ,and Arizona,who say different reasons for payment not being made. it has been very disturbing that they can keep the insurance money we owe a balance of about 19,000 dollars and have never been late with a payment. .they are holding more than 25,000 dollars . it looks like we will have to get a loan to pay the contractor so be careful not to get a loan with them.

  4. caakewalk says:

    We have the similar situation with this awful bank. Bank of America is asking ransom to cash an insurance proceeds check. Yes. you read it right. The bank which is now facing criminal charges from the Justice Department now says that it will only endorse the insurance check if we give them a large amount of money. This is something unheard of in a civilized business sector. Our local government department which monitors insurance related matters could not do much about it. More over, it seems the insurance company may be colluding with Bank of America so that the house will go into foreclosure by not re-issuing a useless check.

    When does the Federal government comes to know that this notorious bank is highly unethical and must be either closed down and taken over by the government for proper banking practice?

  5. Jennifer Crespo says:

    My name is Jose I Crespo. I live in New York. My home was devastated by hurricane Sandy. My mortgage company is Bank of America.
    Bank of America is holding my money hostage. I can’t proceed without funds for demoliton. The contractors know that Bank of America is notorious for holding money, dispersing too little too late, holding up progress with inspections that take too long…so contractors don’t want to work on my home.
    Being that I don’t have any money to work with, and my house is bordering a mold civilization…my idea was to avoid further losses and take up demolition and clean up on my own…acting as my own contractor. Bank of America CLEARLY told me that they would NOT pay me for any labor if I acted as my own contractor. Even though they are paid by the flood insurance policy for demolition, they will not pay me to do it. So if I do it myself, they pocket the $15000 that flood insuraance paid out. This is flat out theft. So much for trying to save my home from total destruction.

    • Joanne Savino says:

      We lost the first floor of our home to Hurricane Sandy. Bank of America is also holding our insurance money hostage indefinitely, they say. They have already sent out inspectors and have pictures for proof that we did rebuild the home. They say that is not good enough. They want receipts for EVERYTHING that was purchased or done. They didn’t tell us this until yesterday…two months after the storm. I am ready to lose my mind. I have probably spent 10 hours on the phone and on hold with horrible customer service reps that each give you a different answer. We feel our only option is to hire an attorney. We are in contact with the Governor’s office as well. The very first item on my agenda is to refinance and NEVER use Bank of America again. I plan on going to the media, and anyone else that may listen and spread my story. We will never get this area rebuilt because of these people. Heartless, horrible people. Shame on you Bank of America.

  6. Mike says:

    Here is a link to an interesting Credit Slips post along with some interesting comments on this topic.

    (The original post was from last summer.)

  7. stripes says:

    Whenever I had an insurance claim, the mortgage servicer was never involved. It was between me and the insurance company. Thankfully, I have never suffered a total loss. That would most likely involve a lawsuit and a title dispute if the bank pocketed the funds. I have no doubt at this point they would try that. Their greed is reaching monumental proportions. I feel sorry for the 800 homeowners whose homes are literally underwater in Lousiana because of the recent hurricane. The homeowners should be legally protected by the homeowners
    insurance, esp, if it is a matter of life and limb.

  8. yvonne says:

    I also know that some banks have taken out insurance while the homeowner also pays for his insurance apart from the bank…wonder how many other insurance premiums the banks pay for from other companie and how many checks they do receive…am keeping my eyes on this investigation,

  9. yvonne says:

    After Andrew, the insurance adjusters brought to us our personal property damages check…one lump sum…saying they would be forthcoming with rebuilding the home regardless of the cost as the insurance we had was their best policy…we used the PP check to pay off the loan, we received back a huge sum of money after that from the bank as we had been prepaying our principal for some years…then we received the full insurance amount from the insurance company. No need then for bank to do any endorsement…while we were rebuilding,adjusters kept checking with us our progress… incidentally, we wanted to rebuild…anyway, we kept our records, hired our own contractors, as HO we could be our own contractors and hire subcontractors which we chose to do as we were informed Realtors about mechanic liens and did not want contractors to illegally file liens against our property…we ordered our own materials and paid for labour only…then we were surprised by the insurance company at the end after we submitted our costs, that they added an additional 5% as contractor’s fees…if we had hired a contractor instead they would have been paid 10%…of course we welcomed the surprise. Not sure how much has changed since…but our rates did take a super hike to over 20% of what we used to pay for insurance, due to the JWUA now Citizens…they continue to rip off the Florida HO.
    Challenge everything…

  10. woodknotgo says:

    AMEN ! I know without a doubt that Bank America steals Insurance Pyout checks ! Applied for FEMA funds for a neighbor-after six months & 2 appeals-BAC took the $85,000. FEMA check saying they deducted it from mortgage-THEY DID NOT ! The home went to a CourtHouse FC Auction. Bidders inspecting the property showed me their paperwork-the $85,000.
    was NOT APPLIED ! Reported to Clerk-sale canceled- then two years later-Aug 9th-Bank of New York Mellon “won” the 2nd auction for one hundred lousy dollars !

  11. stripes says:

    The American people are being held hostage by the Corporate Governments unsustainable debt. The only investments the FED has are a lot of promises to pay by WE THE PEOPLE. The politicians should have never allowed Wall Street to oversell investments in all of their debt to the tune of a quadrillion dollars. Because of that massive fraud, ALL of their debt is insolvent and they are who and what destroyed the economy. I blame the politicians who allowed it in both parties.

  12. James says:

    This depends on the specific insurance contract involved AND the state law in question.

    In Florida, and I suspect most judicial foreclosure states, you own your home, the bank only has a lien on it. Your home owners insurance contact is probably directly with the insurance provider and unless someone else is NAMED in the contract as a beneficiary, you, the home owner, should get any payout of insurance funds. It is then your choice if you rebuild or take the funds for a permanent vacation in bora bora.

    Now, IF the bank gets a deficiency judgment against you after foreclosing, but before you get a payout, then it can use the judgment to go after any funds you have, or have coming.

    Forced place insurance policies may well be different. In that case your mortgage company may have made themselves the first beneficiary on the policy, even though you are getting charged for it.

    This all comes down to WHO is the named beneficiary on the insurance contract.

    There is good case law in Florida that in most cases prevents a party from obtaining a temporary injunction against disbursement of funds before a final judgement.

    Some times a mortgage company or bank my attempt to get an injunction that ties up the insurance payment, pending the outcome of their foreclosure action. This is wrong. In Florida a temporary injunction, for example an order to pay the funds into the registry of the court pending outcome, can only be issued if the funds in question are the SUBJECT of the pleadings. (If the foreclosure complaint specifically address the insurance payment in question). Otherwise plaintiff must wait until they have a final judgment in their favor, for money damages from a deficiency judgment (which is different from the equitable judgement for foreclosure), before they can cast around for any of your assets to attach.

    If you are in Florida and your lawyer has a question about this they are welcome to contact me about the legal research I have previously done on this issue. If you are pro-se, (representing your self), then I might be able to point you in the direction of some illustrative court cases, but understand I cannot give you legal advice about your individual case, insurance policy or situation, or how these cases might apply to your individual case.

    • Both the homeowner and the bank are beneficiaries. Every instance I have encountered in Florida with insurance checks is the check is written to both the mortgagor and the mortgagee. Bank won’t sign it if homeowner does not sign it first. You send it to your bank with your signature for release of funds and they keep your money.

    • JAMES.
      If you are in Florida and I AM ASKING about the legal research this issue. I am pro-se, (representing your self), are u able to point you in the direction of some illustrative court cases, but understand I cannot give you legal advice about your individual case, insurance policy or situation, or how these cases might apply to your individual case. this happened from a tornado aug,2 2011 and i payed for insurance also inspector and follwed citizens gambit. Fix payed numerous dollars and lost my home.

    • Lynda Dee says:

      Hello James. Hoping you can guide me towards finding my answer. Will try to be brief. Our home was in a major accidental fire. (Florida). we are finally at the point were we are ready to settle up with the insurance company. The check will be made out to both us and the bank. We worked very hard to pay down our mortgage. The payout from the insurance company will be over double the amount of the balance due owed on the mortgage. Heres the question..Instead of having them oversee the rebuild of the home and piece out the payments..We would rather pay off the mortgage (out of the settlement check) and just have them issue us a check for the overage. Is this possible?. Please advise and thank you so very very much.

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