Three things servicers need to consider with HUD's new conveyance standard.
What does it actually mean to repair per the scope of work indicated on the insurance documents?
Is this standard different from how HUD demanded lenders address remediation to insurable damage prior to ML 2016-02? How can servicers most efficiently meet this new standard?
Here are three key things servicers should know in light of this new conveyance standard.
1. Repairing to the scope of work
When an insurer settles a hazard claim for insurable damage to a dwelling, the adjuster assigned the loss will prepare a scope of work (also referred to as the adjuster's estimate or scope of loss). The scope of work is a detailed description of the area of the dwelling that has suffered insurable damage (routinely identified by room); a description of the item(s) to be repaired or replaced; an identification of the quantity, volume or square footage; and a breakdown of the money allotted to replace said item(s).
The new conveyance standard as set forth in ML 2016-02 requires adherence to the scope of work not only in addressing every line item, but in the event of replacement, using materials or products of like, kind and quality. If certain internal doors in a home damaged by fire were identified in the scope of work, the doors would need to be replaced. If granite kitchen countertops were identified in the scope as needing to be replaced, the countertops installed would need to match. The items need to be replaced with that of like, kind and quality as those identified in the scope.
In the past, many of the line items identified in an adjuster's scope of work were not necessary to complete in order for a property to meet HUD conveyance condition. Damaged items could be replaced with stock or after-market products, or not replaced at all.
Mortgage servicers must now be diligent in making sure that all items identified in the adjuster's scope of work are addressed at the property. These efforts can be efficiently achieved through good communication, specifically sharing documentation across departments and with vendors in the mortgage servicers' field network.
2. Coordinating documentation
Many mortgage servicers have different staff, and often different departments, charged with the recovery of hazard claim funds on damaged properties, and remediation and preservation of the asset. The new conveyance standard in ML 2016-02 demands that default servicing departments work together with their vendors to ensure compliance and preserve the mortgage servicers' rights.
The departments responsible for property preservation and property condition must have access to and an understanding of the insurer's claim documents--particularly the insurance adjuster's scope of work--and be able to communicate what remediation efforts are needed at the property to their field network.
If the department managing the hazard claim is not the department managing property preservation and remediation, the mortgage servicer must have a strong focus on interoffice communication and document sharing. The vendors in the field will need to bid to repair to the adjuster's scope of work, and the operational staff for the mortgage servicer must ensure that the work completed in the field matches the work called for in the adjuster's scope.
Accordingly, memorializing the condition of the property with accurate photo documentation has become of paramount importance to both mortgage servicers and their vendors. Accurate photos do not necessarily equate to the number of photos, but to the clarity of the photos and the story they tell.
The documentation--particularly photos--give the mortgage servicer the ability to follow the progress of a repair, determine if that progress matches what is called for in the scope of work and confirm that the work was completed in accordance with the scope of work.
3. Claiming recoverable depreciation
Mortgage servicers can meet the new HUD conveyance standard and offset some of the corporate costs associated with managing a vacant asset in default. When a damaged property is repaired to the adjuster's scope of work, the lender can claim the recoverable depreciation under the applicable insurance policy.
Every hazard claim settlement under a dwelling policy is subject to depreciation. The insurance company settling the loss depreciates the value of the claim because the items that need to be remediated and/or replaced have a decrease in value based on age, decay or wear and tear. The insurer will withhold money from the settlement funds unless repairs are completed. This withheld money is called the recoverable depreciation.
When mortgage servicers repair the property to the adjuster's scope of work, the servicer can then claim the recoverable depreciation (if they remediate within the period of time allotted by the insurance policy). This approach has two benefits: It will limit, if not offset, the corporate contribution many servicers incur in property remediation; and, by securing the recoverable depreciation, the servicer has verified that it has completed repairs pursuant to the adjuster's scope of work.
Once a servicer completes repairs to a damaged property and a claim for the recoverable depreciation is submitted to the insurer, an adjuster will verify the work completed to the property. The adjuster will confirm that the repairs were completed to the scope of work, using materials and goods of like, kind and quality to those that were damaged or destroyed. Release of the recoverable depreciation not only offsets corporate costs, it independently confirms that the servicer completed all the work according to the adjuster's scope.
The challenge of meeting HUD's new conveyance standard requires a strategy shift for servicers. It is of paramount importance for servicers to perform a thorough review of the scope of work to determine if the damages identified in the document match the condition at the property, and ensure that the settlement funds provided can remediate said damage. Choosing a vendor who can provide such a thorough review, while efficiently managing the insurable repairs to the adjuster's scope of work, should be a top priority in a lender's default servicing strategy.
Patrick Nackley is senior vice president of Superior Home Services Inc., Scottsdale, Arizona, a hazard insurance recovery and property repair management company. He can be reached at firstname.lastname@example.org.
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|Title Annotation:||COLUMNS: SERVICING; Department of Housing and Urban Development|
|Comment:||Three things servicers need to consider with HUD's new conveyance standard.(COLUMNS: SERVICING)(Department of Housing and Urban Development)|
|Date:||Jul 1, 2016|
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