A homeowner cancels their insurance policy days before their home burns to the ground in a fire. A commercial borrower on the coast inadvertently fails to secure flood or wind coverage before a major hurricane hits. And the worst of it…. your financial institution holds the mortgage on both properties. Inevitably, borrower oversights can lead to lender risk.
How do you ensure that the value of your loan is protected when your customer doesn’t secure the right coverage? Or, that your borrower insurance tracking operations are protected against mistakes? For these missteps and more mortgage lender risks, there’s Mortgage Impairment (MI) insurance.
To minimize the risk associated with originating, selling and servicing mortgage impairment insurance stands behind financial institutions to protect the lender’s interest should certain situations occur. Knowing which type to secure and what’s best for the portfolio of mortgages your institution holds or services is where it gets tricky. To be sure, ask yourself these questions:
FAQ #1: Which type of mortgage impairment insurance do you need? Narrow Form vs. Broad Form – What’s the difference?
Mortgage impairment insurance, or mortgage errors and omissions (E&O) coverage generally comes in two forms. Narrow Form coverage is mortgage E&O in its most basic form. It’s what financial institutions are required to have in order to comply with regulations, and will cover a limited set of situations.
Broad Form is significantly enhanced mortgage E&O coverage. The Broad Form coverage is effectively two types of insurance married together:
1. Extra E&O. Covers a lender’s loss for certain servicing-related operations.
2. Balance of perils. Covers lender’s loss from perils NOT required of a borrower that are not excluded by the mortgage impairment insurance policy. For example, a house destroyed by an earthquake when the borrower was not required to carry quake insurance.
Regulatory mortgage impairment insurance requirements are based on a sliding scale that directly correlates to the size of a financial institution’s portfolio of mortgages. Keep in mind these requirements are a bare minimum, and may not provide adequate coverage for a big claim or multiple claims in one calendar year.
Local, community banks will sometimes carry Narrow Form coverage, but limits are often inadequate when it comes to backing the complete scope of a financial institution’s properties. For financial institutions concerned about risk management, a Broad Form policy with one or both endorsements will provide the most complete coverage possible.
FAQ #2: How should you buy your mortgage impairment insurance coverage? Should you choose stand-alone vs. packaged – What’s the difference?
Stand-alone mortgage impairment insurance coverage, in Narrow or Broad Form, can be independently negotiated to meet the needs of any financial institution, including desired premiums, limits and endorsements.
Lenders might also consider packaged mortgage impairment insurance coverage, which will come in one of two forms: a Federal Institution Bond (FIB) that includes robbery and theft coverage, or a bundled property and casualty policy. A packaged policy will feature
Narrow Form mortgage impairment insurance coverage, and therefore policy limits may be compromised if there is a big claim on one of the other polices in the package.
FAQ #3: What’s best for your financial institution?
Base your decision as to which mortgage impairment insurance coverage is best for your business on a thorough analysis of your portfolio, systemic risk, origination/servicing operations and risk tolerance. Working with a broker to analyze these key data points will both get you to the right policy, and will provide your risk manager with a road map of how the decision was made and why. This analysis will serve you beyond your institution’s initial purchase, as a backup should the risk manager be called upon to support the financial institution’s decision.
Contact your HUB Financial Institutions specialist for more information about safeguarding your mortgage impairment risk.