Basics: Mortgage Lender Advances During Borrower Default
Property TaxesIt is a condition of all mortgages that the property taxes must be kept current. Whether or not the borrower is in a payment default, if the taxes are delinquent the lender can (and will) make the payment. The amount advanced is recoverable from the borrower, usually through an increase in the monthly payment. The lender will also add an amount necessary to pay the next year's amount.
Even if the loan did not originally have an escrow feature, the lender can impose an escrow account as a result of a delinquency. Interest will not be charged on the advanced amount and the borrower can request that the advance be spread over more than 12 months if the payment results is a genuine hardship but the lender is under no obligation to accept an extended repayment plan.
Lenders have the right to advance taxes under the mortgage because taxing authorities have foreclosure rights that can be superior to the lender and it is the lender's right to protect the mortgage lien's priority.
Homeowners InsuranceMaintaining insurance on the property is another condition of all mortgages. For obvious reasons, a lender needs to know that the property is insured against catastrophic damage; this is collateral protection at it's most fundamental level. If the borrower fails to insure the property, the lender will place its own insurance on the property and recover the cost in the same manner as property taxes.
Borrowers should be aware that a lender placed insurance policy offers no coverage for personal belongings or many of the other useful features of a Homeowners Insurance policy. Additionally it can cost several times the amount of a voluntary policy. Despite these shortcomings, a lender will not advance for a voluntary policy.
If making the insurance payment is a problem, discuss a payment plan with the insurance company or ask the lender about establishing an escrow account before the policy lapses. Lender placed insurance is a high-cost, low-coverage policy you don't want!
InspectionsOnce a mortgage loan becomes delinquent, the lender will typically order an exterior inspection of the property. This is done to make sure that the property has not been abandoned and to determine if any special action such as securing or winterizing is required. If an inspection reveals the need for further action, such as re-keying, debris clearing, removal of hazardous material or dangerous conditions such as junk cars, old refrigerators outside, paint or gasoline containers, etc., the lender may take such action as it deems necessary to make the property safe.
In most states, inspection and property preservation charges incurred during default can be charged to the borrower; they will most often appear on the monthly statement uder a "corporate advance" heading. Charges to remediate hazardous conditions may be similarly billed.
Municipal CitationsIt is frequently the case that a property securing a delinquent loan is abandoned. In many instances, the local municipality will issue a citation for overgrown lawns, ill-maintained pools, or other conditions that violate local ordinances. The municipality has the legal authority to cure the condition and lien the property for the costs involved although it will usually give the homeowner and lender an opportunity to cure them first.
Lenders receive these citations along with homeowners because municipal liens can take priority over the lender's lien (although not always). Under the mortgage, the lender has, and will exercise, the right to cure the condition in order to avoid the lien.
Lender expenses in response to these citations are chargeable to the borrower and will appear as a corporate advance on the statement. They may be chargeable in full immediately, there is no obligation to spread them over a period of multiple payments.
Valuations - BPOMany lenders will order a Broker Price Opinion (BPO) as soon as a loan goes into default and on a regular schedule thereafter as long as the default continues. The frequency of the valuations is dependent on the lender's policy, but often as frequently as every 30 days. The charges for these BPOs should be absorbed by the lender and most states limit the lender's ability to charge the borrower for them. However, once the property goes into foreclosure, some level of valuation services are chargeable to the borrower in most states. Additionally, if the borrower and lender are engaged in loss mitigation efforts, a valuation, chargeable to the borrower, is appropriate and beneficial as it will allow the lender to establish the parameters of the potential workout.
Concluding ThoughtsIn a default situation, the lender has many rights under the terms of the mortgage to protect the property and preserve value. In most cases, the expenses of doing so are chargeable to the borrower, although most states have laws imposing some limitations on the type and frequency of those expenses. Even if a borrower is current on payments, a default in other obligations, such as payment of taxes and insurance, or allowing hazardous conditions to develop, can trigger a lender's right to cure and charge.
An escrow account for taxes and insurance is one of the best ways for the homeowner to avoid the sudden outlay of large amounts for these items. Most lenders will set up an escrow account on request for these. Homeowners' Association dues are not escrowed by lenders, they must be budgeted and paid for directly by the homeowner.