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December 4, 2008

December 4, 2008

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  • 1. Wildfire Roadmap to Recovery: Meeting #6, January 24, 2008 Rancho Bernardo Community Presbyterian Church - Private Construction Loan Process - Working with Lender to Release Insurance Proceeds Karen Reimus [email_address]
  • 2.  
  • 3. Availability of R2R Powerpoint Presentations
    • www.rbcpc.org
      • Fire Recovery Ministry
      • Road-to-Recovery Educational Series
    • Beginning Feb 1, 2008
  • 4. Fine print:
    • The information provided in this program is intended for general educational purposes only. It should not be construed as legal advice.
    • The speakers at today’s program are volunteering their time as educators.
    • Neither United Policyholders nor the Rancho Bernardo Community Presbyterian Church endorse or warrant the message or services of any volunteer speakers.
  • 5. Financing issues relating to rebuilding
    • Private Construction Loans
    • SBA Loans
    • Working with your lender to release insurance proceeds
  • 6. An Overview of the Private Construction Loan Process
    • Loan acceptance
    • Builder review
    • Project acceptance
    • Loan approval and loan closing
    • Initial draw disbursed, construction begins
    • Construction completed, final draw approved
    • At last…welcome (back) home
  • 7. SBA Loans
    • With credit access tightening in response to the subprime mortgage crisis, the SBA's disaster loan program, offering 30-year, fixed interest rates well below market levels, could prove critical to recovery for many wildfire victims.
    • To receive a disaster loan, applicants must have an acceptable credit history and a dependable stream of income large enough to cover monthly payments, which begin five months after the financing is delivered. The loan money is delivered in increments based on the progress of construction.
    • The loans may be ideal for fire survivors who don't have savings to tap for repairs or would take a big tax hit for liquidating stock investments
  • 8. If you qualify for an SBA loan:
    • Homeowners who qualify for the lending program can borrow up to:
      • $200,000 at a fixed rate of 2.94 percent to repair or replace their homes
      • $40,000 to replace personal property, such as appliances and furniture.
  • 9. When working with your lender to release insurance proceeds…Know going in:
    • Your mortgage documents are set up to protect the mortgage company from you taking your insurance rebuild money and disappearing
    • Your lender, like your insurer, must act in good faith when dealing with you
    • Your lender may pay 2% interest on insurance proceeds they are holding but only if you push them to do so
  • 10. Periodic payments as phases are satisfactorily completed:
    • All funds for construction should be held in a fund control account and be dispersed by a third party throughout construction to the general contractor.
  • 11. Hire carefully:
    • Make sure your Architect and General Contractor are fully licensed in the State of California.
    • Check license status with the CA. Contractor’s State Licensing Board at: www.cslb.ca.gov or call 1-800-321-CSLB (2752).
  • 12. Our heartfelt thanks to:
    • The Rancho Bernardo Community Presbyterian Church
    • All our UP Mentors and Sponsors
    • The speakers at tonight’s meeting
  • 13. Overview of Private Construction-to-Permanent Loan Process Shelley Lundborg Construction Loan Specialist Served Cedar Fire Survivors
  • 14. You have unique needs
    • Every loan represents a unique borrower
    • with a unique situation
    • - Your situation is very unique and stressful
    • Look for loan officer and mortgage company
    • expert in construction loans
      • Pitfalls to avoid
    • Look for best service, lowest fees, interest, discounts
      • How can you tell?
    • Look for Lender and Agent sensitive to your rebuilding
    • under duress following the fires
  • 15. What is a Construction-to-Permanent Loan?
    • A Construction-to-Permanent Loan is two loans in one.
    • Unlike buying an existing home, financing the building of a new home includes a construction phase, the period of time your new home is being built.
    • Once construction is complete, a permanent mortgage is needed.
    • A Construction-to-Permanent Loan includes both the construction phase and the permanent mortgage. This is why it’s called a Construction-to-Permanent Loan.
  • 16. How does the construction loan process work?
    • The Construction-to-Permanent Loan process is similar to the process of a standard home purchase or refinance transaction.
    • Unlike a purchase transaction for an existing home, a Construction-to-Permanent Loan involves determining the value of a home that is not yet constructed.
    • In determining the future value of your new home, we request information on the planned improvements and construction costs.
  • 17. Overview of the Process
    • Pre-qualification/Application
    • Underwriting
    • COE – Approval
    • Construction Period
    • Permanent Period
  • 18. Glossary of Terms - Handout at Entrance
    • Fixed Price Contract
    • Cost Plus Contract
    • Supervisory Contract
    • Cost Breakdown
    • Description of Materials
    • Allowance Items
    • Draw
    • By Owner Items
    • Contingency Reserve
    • Interest Reserve
  • 19. What is “one-time close” and how does it save time and money?
    • One-time close means with one construction loan application, qualification and closing, you get all the financing you need to build your home and obtain a permanent mortgage when construction is complete.
    • Best of all, you only pay one set of closing costs.
    • There are no payments during the construction phase so you can focus on your new home construction project.
  • 20. What is meant by “no-payment” Construction-to-Permanent Loan?
    • As part of your Construction-to-Permanent Loan budget, we establish an account to pay the estimated interest costs during the construction of your home.
    • This way you make no monthly payments during construction unless your interest reserve account is depleted before completion of your project.
  • 21. What will home building cost?
    • Start by guesstimating these costs:
    • + Buildable Site (You already have it)
    • + Home Design
    • + Construction Cost
    • + Cost of Financing
    • __________________________________
    • = TOTAL COST TO BUILD YOUR CUSTOM HOME
  • 22. Once I get started, how do I access my funds?
    • Unlike a standard purchase mortgage, a Construction Loan is disbursed in the form of payments (or "draws") as each phase of construction is completed.
  • 23. What forms will be provided by the lender?
    • Typically, a lender will provide you with a variety of forms (although this may differ from lender to lender):
    • ``application checklist'' form
    • ``residential loan application'' form
    • ``description of materials'' form
    • ``construction cost breakdown'' form
  • 24. What information will be required from you?
    • Employer's address and phone number, length of time you've worked there,and your current position and monthly income; OR
    • (if self-employed) profit and loss statements, tax returns and balance sheets for the past two years, as well as the current period.
    • Your personal asset and liability backup information, including account numbers, balances, and addresses and phone numbers of your financial institutions.
  • 25. What information will be required from you? (con’t)
    • Details of lot acquisition such as deed or a copy of the earnest money agreement. Also, you must provide notification of any covenants which apply such as approval by an architectural review committee.
    • Full documentation for your home building project:
      • A complete set of working drawings
      • A description of materials
      • A construction cost breakdown
  • 26. Work with your Contractor to Provide Needed Documents
    • Scrutinize the line items and make sure that you agree
    • Review line items carefully
      • materials
      • cost
    • Build in some breadth in line categories to
    • allow for options on construction items
    • - Example: “Exterior Siding” allows for stucco, brick, rock, HardieBoard
    • A line item of “stucco” limits payment to stucco.
  • 27. Discounts that may be offered by various lenders
    • Following 2003 Cedar Fire Loan with no points, closing costs, etc
    • Discount on Title Insurance
    • Following 2007 Firestorm
    • TBD
    • 40 – 50% discount on Title Insurance
  • 28. Summary
    • Every situation is unique
    • Work with an experienced lender/loan officer to determine the best option for you
    • There are many options available
    • Gather all your information before making a commitment to anyone in the process
  • 29. Questions and Answers
    • Contact Information:
    • Shelley Lundborg
    • 619-993-4591
  • 30. A Second Perspective on the Private Construction Loan Process Brian Wada Construction Lending Officer/Loan Officer
  • 31. Working With Your Lender To Release Insurance Proceeds Ken S Klein 2003 Cedar Fire Survivor United Policyholders Disaster Recovery Mentor  
  • 32. Checks Made out from Insurance Company to Lender and You
    • If you have a mortgage, then some or all of the checks from your insurance company will be made payable jointly to BOTH you and your mortgage company. The mortgage company will end up with the money in its account.
    • This will mean that at least at first, your mortgage company, not you, will control the money.
  • 33. Objective
    • The goal of this presentation is to explain to you how this happens, and to give you strategies to try to get control of the most money as soon as possible.
  • 34. Your rights
    • Here is the really big overview point:
    • You have some, limited rights, but to get the most money as quickly as possible will take knowledge and persistence.
  • 35. Why does this happen?
    • Your mortgage documents protect the mortgage company preventing you from taking your insurance rebuild money and disappearing.
    • In other words, the property and the house are the collateral for the loan; and so if you cashed the checks and did not rebuild, then the mortgage company would have a problem.
    • These documents set up a system to prevent you from doing that.
  • 36.
    • The standard California mortgage (and so, probably, your mortgage), says:
    • 5. Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss
  • 37.
    • When you borrowed money, you agreed that one way the mortgage company would be protected would be that the mortgage company would be co-insured, right along with you, for any harm to your “improvements.”
  • 38. What does this mean?
    • It means is that unless and until you get your mortgage company to agree to something different (in writing), every Coverage A check you get, and maybe some of your other coverage checks, will say something like: “ Pay to the order of Jane Doe and Jane Doe’s Mortgage Company .”
  • 39.
    • You then will be required to endorse the check first, and the mortgage company will deposit the money into its own account, and only will release the money to you later.
  • 40. Big Question 1 (of 5): If the checks are more than the mortgage, does the Lender get to keep more money than I owe them on the mortgage?
    • It should not. Also in paragraph 5 from the standard California mortgage, you only agree,
    • “… to generally assign rights to insurance proceeds to the holder of the Note up to the amount of the outstanding loan balance .”
    • Indeed, for this reason, some mortgage companies also have a written policy saying the company only holds money up to the amount of the outstanding loan balance.
  • 41.
    • Why does the company need such a policy if it already is part of the mortgage?
    • The mortgage company has a special department (the “Loss Department”) that handles control of rebuild money after you have had a house fire. This work often is actually outsourced to an independent company. In either circumstance, the people you deal with may not know or try to know what the mortgage actually says.
    • LESSON : Knowledge is power. Read and understand your documents, and use that knowledge to your advantage.
  • 42. Be diligent, persistent, proactive
    • The Loss Department is not user-friendly.
    • Do not be surprised if:
      • the “Loss Department” will not, on its own, refund to
      • you the extra money until you ask for it
      • or if it is difficult to talk to a live human being at the
      • Loss Department at all
      • or if you get form responses to letters rather than answer your questions.
  • 43. Big Question 2: Will the mortgage co. be a co-insured on only the Coverage A checks?
    • Perhaps. Paragraph 5 also says:
    • 5. Property Insurance. …. If Borrower obtain s any form of insurance coverage, not otherwise required by Lender, for damage to, or destruction of, the Property, such policy shall include a standard mortgage clause and shall name Lender as mortgagee and/or as an additional loss payee ….
  • 44.
    • A good rule of thumb is to assume that the mortgage company could claim a right to be treated as a co-insured on insurance coverage for those things that are or must stay on the property when the house is sold -- plants, grass, the house, the fence, the driveway, etc.
  • 45.
    • But insurance companies often only co-write the Coverage A checks, and Loss Departments often do not challenge that.
  • 46. Big Question 3: Do I get interest on the money while the mortgage company holds it?
    • Probably, but usually not without a fight (at least a little one). That same paragraph 5 in the standard California mortgage also says:
    • “ Unless an agreement is made in writing or Applicable Law requires interest to be paid on such insurance proceeds, Lender shall not be required to pay Borrower any interest or earnings on such proceeds.”
  • 47.
    • “ §2954.8. Payment of Interest to Borrower.
    • (a) Every financial institution that makes loans upon the security of real property containing only a one-to four­family residence and located in this state or purchases obligations secured by such property and that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property , shall pay interest on the amount so held to the borrower.
    • The interest on such amounts shall be at the rate of at least 2 percent simple interest per annum .
    • Such interest shall be credited to the borrower's account annually or upon termination of such account, whichever is earlier.”
    California arguably does have an “applicable law.” The California Civil Code says:
  • 48.
    • Many folks successfully argue to their mortgage company that insurance proceeds checks to fund a rebuild are “ money in advance for payment … for … purposes relating to the property .” Simply put, they get 2% interest.
    • CAUTION : To my knowledge, no one has ever fought about it all the way through to court, and so there is no “final” answer.
  • 49.
    • There is another, different argument you could try -- the leading book on California real estate law – Miller and Starr – argues that there is a California court decision suggesting that if a mortgage company holds the money in an interest bearing account, then the interest is your money (if you want to look this up, it is section 10:61 of the treatise titled California Real Estate by Miller & Starr).
  • 50. So here is another approach you could take:
    • Ask your mortgage company for a copy of the deposit slip reflecting the account number the company deposited the funds into, and the account documents for that account verifying that funds held there neither bore interest nor were invested. I did this in 2003, and my mortgage company just gave in and transferred to me all of the money.
    • LESSON : Sometimes it matters more that you are a pain in the neck than that the statute applies.
  • 51. Big Question 4: How quick do I get the money?
    • Not as quick as you would hope for. Once again, let us visit paragraph 5 of the standard California mortgage, which says,
    • “ During such repair and restoration period, Lender shall have the right to hold such insurance proceeds … . Lender may disburse proceeds for the repairs and restoration in a single payment or, in a series of progress payments as the work is completed. ”
  • 52.
    • But … it is a “business reality” that a builder is not going to do all the work before getting paid any of the money.
    • It also is a “business reality,” however, that most builders are used to working in the environment where they are not paid entirely in advance, but rather get partial, periodic payments with at least some amount withheld until completion.
  • 53. Your mortgage company understands this
    • Because your mortgage requires you to rebuild or restore your property to good condition after a fire, the mortgage company will not hold all the money to the end, because that could be a “breach [by the mortgage company] of the implied covenant of good faith and fair dealing.”
    • This is lawyer-speak for the company has to play fair to avoid getting sued. So you will get the money in “progress payments.”
  • 54. Typical Progress Payments
    • A typical progress payment policy is to release:
      • 1/3 of the held proceeds up front
      • 1/3 upon inspection verifying 50% completion
      • 1/3 verifying 100% completion
  • 55. Big Question 5 (the last one): Can the mortgage company just use the money to pay off the mortgage, even if I do not want them to?
    • The short answer: NO. That would also be a “bad faith” problem.
  • 56. So what is the bottom line; what should I do?
    • Read your documents.
    • Get in touch with your mortgage company, both by telephone and by mail.
    • Stay in touch. Be persistent and patient, and be polite but firm.
    • Keep a diary of the name and contact number (& the name of their superior and that person’s contact number) of every person you talk to.
    • Write detailed letters that include a full recitation of prior communications.
  • 57. When dealing with your mortgage company, consider emphasizing at least one or more of the following points:
    • Consider emphasizing:
      • Without the money, you cannot get their collateral rebuilt .
      • Treating you well is good public relations for them, and in this “sub-prime crisis” environment they need good PR.
      • You likely are not their only borrower who lost a home in this community, and if there is a trial to determine if they are treating you correctly, then (1) it will be on behalf of ALL of their borrowers who lost homes in the wildfire, and (2) every juror will be either (a) someone who lost their home, (b) someone who knows someone who lost their home, or (c) someone who thinks “Oh my goodness I could have lost my home.”
  • 58. When dealing with your mortgage company, consider emphasizing at least one or more of the following points:
    • The mortgage company has no reason to be “over-collateralized.” Your raw land is part of the collateral, and has value of its own. Thus, to some extent, giving you money “earlier” than the mortgage company has to does not leave the mortgage company completely exposed were you to take the money and disappear.
    • Ask them to document what happens to the money while they have it (does it generate interest, and if not, is it invested) – the answer could be uncomfortable for them, and if so, that is good for you.
  • 59. Summary : Q & A
    • CAUTION : This has been a discussion of how the world works under standard California documents. You may not have standard California documents.
    • Read your documents.
  • 60. Break Out Sessions for Fire Survivors
    • Open to 9:30 pm: Firm Stop time
    • Upstairs:
      • State Farm : Dormer West
      • Farmers : Skylight West
      • Allstate : Upper Courtside East
    • Other Companies: Sanctuary
  • 61.