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66 by repair companies, which are statutorily prohibited for creating a conflict of interest. Objectively measuring relationships is always a challenge. One clear basis for measurement which can be used is to require confirmation from vendors of current accreditation and to require a structured program for continuing staff education. Proper licensing in each state and an established program for sustaining staff technical expertise is a good means to make an apples-to- apples comparison. A servicer should utilize a qualified, licensed vendor to assertively file claims, which make appropriate and accurate arguments for recovery of insurance. is approach may result in a higher proportion of denials, but also yields a higher total portfolio recovery amount. To measure success in recoveries, a comparison between the total numbers of damaged properties to the dollars recovered across a portfolio represents the gold standard. As with most servicing functions, outcomes must be balanced against timeliness. e key time stages are "damage discovery to claim filing;" "claim filing to carrier claim determination;" and "carrier determination to receipt of funds." If repairs are involved, additional stages are "the completion of repair to claiming 'recoverable depreciation' and the receipt of additional funds." What does this mean? Most hazard-insurance policies have replacement cost coverage, which means the insurance carrier will pay for the cost to repair, less the deductible and depreciation. Insurance carriers require documentation that the repairs have been completed before they will pay part of the insurance benefits determined to be recoverable depreciation or holdback. When an initial claim is filed, these funds are withheld based on age and condition. Following repairs, a subsequent claim should then be submitted. If a servicer or vendor is not filing recoverable depreciation claims, significant money is being left on the table. KEEPING LEMONS OUT OF THE BREADBASKET "Lemon alert": Do not be misled looking for the highest-average recovery amount across a portfolio. As a measurement, highest- average recovery numbers result from a claims administrator cherry-picking the most significant damages. Experts find that half of damaged properties have damages due to theft and vandalism. ese damages generally experience lower per claim recoveries, but still amount to approximately 20 percent of the recovery potential on vacant damaged properties. Servicers can discourage cherry-picking by setting claim-filing thresholds that still allow for recoveries on these damage types. Another "Lemon Alert" is the use of "eye- ball estimates." Typically provided by an on-site contractor, eye-ball estimates often overstate damage costs and are not true representations of insurable damage. Industry estimator tools provide detailed and accurate damage estimates that go far beyond the shooting-from-the-hip contractor estimates and are also recognized by insurance carriers and investor/insurers. Avoid vendors with a "one-and-done" mentality. A successful claim recovery may not be the end of hazard-claim activity on a property. With extenuated default and foreclosure timeframes, a servicer can neither afford to defer action on damage claims nor consider a claim recovery as necessarily being the end of the process. CHOOSING INSURANCE Mortgage insurance and hazard insurance are separate—but related—types of insurance coverage. is is a particularly important distinction when it comes to FHA loans. HUD defines two types of damages, surchargeable and non-surchargeable. All properties conveyed to HUD must be undamaged by fire, flood, earthquake, tornado, hurricane, boiler explosion (for condominiums), and damage resulting from mortgagee neglect. Costs resulting from these types of damage are considered surchargeable and are excluded from the claim for insurance benefits. Servicers must repair the damage or obtain prior written permission from HUD to convey a property with surchargeable damage. Since HUD does not reimburse on FHA mortgage-insurance claims for surchargeable damages, servicers are especially dependent on hazard-claim recoveries to fund repairs of these damage types. Any shortfall between repair expense and recovery requires a servicer to use corporate funds. It is especially important to maximize claim recoveries for these damage types. Whether a portfolio is composed of GSE, government-backed, bank-owned, or private investor-owned loans, your service provider should demonstrate the ability to track and report on each asset type, and to meet standards set in service-level agreements that are customized to meet the requirements for each aspect of the loans and properties in your portfolio. Non-compliant service providers may seem to offer inexpensive services, but these services come with a hidden cost. Regulators may hold servicers accountable for their vendor's compliance with state laws, and the use of unlicensed vendors cre- ates "tail risk" and the potential of regulator, bor- rower, or class-action challenges of the foreclosure process. Further, cost/benefit comparisons, which focus on the fact that the recoveries of licensees experienced in recoveries based on a particular state's insurance laws are larger, should ultimately justify costs offset by dramatically larger recoveries of "what you get to keep". e cost of non-compli- ance can far exceed any savings realized by using non-qualified staff or vendors. KEEPING EYES ON THE PRIZE Valuing "what-you-get-to-keep" has significant direct and indirect benefits for a servicer. Fully licensed and operationally excellent services maximize recovery opportunities. On bank-owned portfolios, this provides a direct financial benefit: these services more than pay for themselves. For all asset types, it provides a servicer with an effective means to maximize recoveries and mitigate risk. Post-hazard claim reviews indicate that up to 30 percent of eligible claims are never filed or denials on valid claims are not appealed. ese lost opportunities are extremely costly for investors, and increases potential risk for servicers. An effective response to this is to conduct a loss analysis, similar to the same process often followed on mortgage-insurance claims. In addition to evaluating the effectiveness of the hazard-claims process, these reviews can identify systemic issues related to notification to carriers of change-in-risk, adequacy of property condition documentation, and consistent maintenance of the policy coverage itself. Hazard claims management involves a science and an art in the fields of insurance as well as servicing. Measuring success is not complicated, but it does require a basic structure that ensures that expectations can be set, measured, and consistently met. As with most industry processes, it also means making sure there is an apples-to-apples comparison–with no lemons.

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