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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 56 May 2025 F E A T U R E as to what is happening with the claim. That is one of the reasons why it is so important to establish an open line of communication with the borrower from the outset of the loss. Once the claim has been approved, the insurance carrier will generally send the insurance check to the borrower, made payable to both the borrower and the lender. » Don't ever endorse the check and then give to the borrower to endorse. It sounds obvious, but it has hap- pened (more than once)! » What if the borrower refuses to endorse the check? Unfortunately, this happens quite often. Depending on the language of the lender's deed of trust, refusing to turn over the insurance proceeds could constitute a default under the deed of trust, giving the lender the right to foreclose. The lender can also sue the borrower to turn over the insurance proceeds. While unlikely, the lender can also ask the insurer to reissue the check directly to the lender. » What if the borrower forges the lender's name? Unfortunately, this too happens way too often. Ideally, the bank who is presented with the check will catch the forgery and refuse to cash it. But, if that does not happen, the lender has claims against the bor- rower, the bank and, potentially, the insurer. The key is to move quickly when this happens. » What if the insurance company refus- es to timely pay (or fails to pay the full claim)? Of course, this never happens as insurance companies are known for timely honoring their insurance obligations! The best solution is for the lender and borrower to work to- gether to apply pressure on the insur- er to timely and fully pay the claim. But, in some instances, no amount of pressure will work. In those instanc- es, the lender may have to sue the insurer to get paid. Unfortunately, our firm has had to do that many times over the years. » Holding the insurance proceeds pending repair or rebuild. Lenders can hold the insurance proceeds similar to how a construction lender handles construction funds, by putting reasonable restrictions on the release of the funds, such as having to meet certain thresholds before the release of additional funds. In fact, lenders may want to consider using a construction fund manager to handle the funds. » What does it mean to apply the funds to the loan? Assuming the lender is entitled to apply the insurance proceeds to the loan, the terms of the deed of trust will control how the funds should be applied, i.e., to advances, interest, late charges, prin- cipal, etc. Of course, there is nothing preventing the lender from agreeing to an alternative application with the borrower. For instance, the lender and borrower could agree that the funds will be held in escrow, to be ap- plied to monthly mortgage payments as they come due. Additional Considerations and Issues S o far, this article has addressed the standard scenario where there's a loss on a current loan. But there are some additional twists and turns that can come into play, including: » Is the borrower still obligated to make payments while waiting for the insurance proceeds or repairing the property? Yes—the borrower is still contractually obligated to make monthly payments on the loan after experiencing a partial or complete loss. Of course, making mortgage payments may be difficult, if not impossible, for borrowers who find themselves having to pay for alterna- tive housing. While not contractually required, lenders may opt to work with borrowers on a limited for- bearance while borrowers come up with a long-term plan with regards to the property. Note—local or state regulations are in the works that may require some lenders to forbear from foreclosing for specific periods of time. Before initiating foreclosure on a property affected by the fires, we encourage lenders to consult with counsel. » What if the loan matures while wait- ing for the insurance proceeds? Like with monthly payments, the loss of the property via fire does not alter the parties' contractual rights. As a result, the borrower is still obligated to pay off the loan when it matures. Again, nothing prevents the lender and bor- rower from working out alternative arrangements. » Can the lender foreclose on a prop- erty affected by the fire? Unless pro- hibited by a state or local ordinance (see above), yes. But check with your counsel first. » If foreclosing, does the damage to the property impact my bidding strategy at the foreclosure sale? Yes—if you only take away one thing from this article, this should be it! California (and many states) have what we call the "full credit bid rule." In a nutshell, if a lender bids the full amount that it is owed at the foreclosure sale, it is deemed to have been made whole. Similarly, if the lender bids, say, $100,000 less than the full debt, the amount of recoverable insurance proceeds is limited to $100,000. Insurance companies regularly use this theory to limit or avoid paying on claims. To avoid making a costly mistake, it is important for lenders to access the damage to the property and bid an amount that is low enough to preserve their right to any insurance proceeds. But—don't bid too low. SB 1079, enacted in 2021, allows certain eligible bidders to outbid the highest bid at the foreclo- sure sale within 45 days following the foreclosure sale. If that happens, the foreclosing lender cannot increase its bid (it does not qualify as an eligible bidder) and risks losing the property for less than what it may be worth. To be