Sunday, April 8, 2012

By REGINA E. CORCORAN Special to The Citizen

Insuring property in the Florida Keys has always been a thorny path. Add a mortgage to the recipe and the mix gets even more dicey. The homeowner could say, "Let's go to Burger King," while the lender says, "No, let's go to Louie's Backyard." Also, if the dwelling is a condo, let's just say, we're not talking Rice Krispies cookies.

When the mortgage company requests proof of insurance from the borrowers, you know it's a good sign. Things are looking up. That chain letter email promising a rosy future that you sent to 50 of your closest friends is kicking in.

Imagine the borrowers are refinancing their primary residence, which is a condominium unit. They bought it a few years ago and during the loan process, someone delivered a certificate of insurance to the lender. It showed that the condo carried a master policy covering the buildings for hazard, flood, windstorm, liability and a fidelity bond.

As part of the refinance process, the condo again supplies a certificate of insurance. The happy borrowers have scheduled a date at the closing office eager to sign the new mortgage documents. Their interest rate is plummeting. Their monthly payment is taking a nose dive.

The day before closing, euphoria vanishes as their cellphone plays Rocky's theme, identifying the caller as their loan officer. "Hurry, quick, you have to go buy a condo owner's dwelling policy, flood and windstorm policy!"

Huh? Condo insurance has been a roulette wheel for years. In the late 1980's and early 1990's, lenders didn't request a unit policy. As good Realtors and loan originators, we encouraged the new owners to buy it.

The tides changed. Starting with FHA, then VA, and soon after the conventional lenders, it became a requirement. Borrowers were told on the day they applied to go buy it as it would be a condition of closing.

Then the pendulum swung the other way. The big buyers of mortgages quit asking for it.

A local insurance professional, Jon Diamond, told me today the game is "pin the tail on the donkey." Some banks require it and some don't. Mortgage brokers will almost always tell borrowers to get it. Bank employees who are loan officers may not.

The good news is that this coverage is very cheap. The condo owner only has to buy insurance to cover the premises "from the Sheetrock in." That means the coverage is for the toilets, cabinets, tile or carpeted floors, appliances, light fixtures, personal property -- you get the idea.

The condo unit owner's coverage may be just $50,000 approximately.

Although the dwelling might cost several hundred thousand dollars to replace, you don't have to buy that much insurance. Nor do you have to buy a policy equal to the loan amount.

The HO-6 or condo unit owner's policy on a condominium unit at La Brisa might cost $450 to $500 per year, for example. The windstorm policy there could be as low as $80 per year, thanks to the superior construction and hurricane shutters.

Also, beware of the possibility of "aftershock." Consider the case where the bank or credit union loan officer doesn't ask the borrowers to supply a condo unit owners policy. Closing takes place. The borrowers skip happily to their new home.

Three weeks later they open an envelope from Mortgages R Us. It informs them that Mortgages R Us bought their loan from the local bank. Oh, and by the way, borrowers, you have to go buy a condo owners policy that protects against hazards including fire, windstorm and flood.

Borrowers' first response is, "THEY CAN'T DO THAT!"

I'm not a lawyer and I don't intend to interpret a mortgage document. Still, just read the following portion out of a standard mortgage.

"Borrower shall keep the improvements now existing ... insured against loss ... for which the lender requires insurance. This insurance shall be maintained in the amounts (including deductible levels) and for the periods that lender requires. What lender requires ... can change during the term of the loan."

What do you think?

Regina E. Corcoran, SRA, is a Florida real estate broker, state-certified residential appraiser and residential contractor. She is president of AmeriRealty Corp. and vice president of AmeriMortgage Corp. She can be reached at ReginaECorcoran@cs.com. Corcoran writes her column exclusively for The Citizen. It appears every other Sunday.