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Sunday, February 17, 2013

Hurricane Sandy, Foreclosure And The Insurance War of Attrition

In the wake of the National Hurricane Center's recent release of its study and analysis of last October's Hurricane Sandy, we are hearing about more distressed homeowners who claim to have been wiped out, first by the storm surge (as almost all damage was flooding from the epic surge), secondly by "delays" from insurers in cutting checks to victims, and thirdly from the banks holding the mortgages on the now-damaged homes.

This morning's New York Post profiles one Staten Island couple facing foreclosure on their now-uninhabitable primary home in the Midland Beach neighborhood.  The couple also owns a now-unrentable rental property.  It is still less than four months after the storm but the couple claims to have received just a minimal insurance payout while the lender on the primary mortgage (Bank of America) has started pre-foreclosure proceedings while the holder of the second lien (Citibank) has sent default notices.

I know several homeowners in ravaged areas of the Jersey Shore, the New York City coastal areas such as Sea Gate and Breezy Point, and elsewhere.  The damage was extensive.  But those homeowners -- particularly in the "wealthier" oceanfront areas -- are in better shape.  And that is because they were in better financial shape prior to Hurricane Sandy.

This brings me to my point: Hurricane Sandy has not caused the hardship of these families as much as it already exposed the already very-shaky, precarious financial condition of many homeowners who were one mishap away from being unable to meet their monthly payments.

Many homeowners took advantage of 90-day forebearance agreements which deferred but did not do away with the monthly payment obligations on the mortgage.  But it was and is madness, sheer madness, to take these agreements in the first place.  Forbearance is not principal reduction; it is deferring the payment. Unless one can reasonably amass the funds to make the lump sum payment (small as it is, representing three months' payments) after 90 days, this is merely delaying the inevitable.  But how bad must someone's finances be that they could not make a monthly mortgage payment weeks after Sandy?

The family profiled by the Post "owned" two properties, but is supposedly so cash-poor that they could not pay rent plus the mortgage on their two properties.  Part of this sentence bears repeating: they were supposedly so cash-poor that they could not pay the mortgage on their two properties. That's right, they owned two properties, at a time when they probably had no business owning one.  Many homeowners continue to be overextended and have such meager savings -- under $10,000 if not far less -- that a job loss, even an extended sickness or deadbeat renter, can become the final straw breaking the camel's back and leading to nonpayment. (Of course, this analysis assumes that the people claiming hardship are being genuine and have not purposely sequestered assets away in order to hide them from creditors or regulators, and the better to claim "need" for government grants or loan forgiveness.)

The usual response to this argument is that the evil bankers or insurance companies are to blame for the hardship, that had the too big to fail financial institutions written bigger checks sooner, none of these tragedies would have happened.  (Now, there is some merit to the criticisms. Insurance companies, after all, profit primarily by breaking, or trying to break, every contract they enter, every policy they write.  On the other hand, insurance policies provide a valuable peace of mind which allows for monetary expansion and the deployment of capital from reserves for emergencies and into productive capital improvements or investments.)

The reality is that the best insurance one has is to be self-insured.  That is, to have enough available resources to be able to withstand a tragedy without having to beg for assistance or to depend on an insurance company payout.  This ability gives you leverage. 

Leverage is the best negotiating tool against financial institutions trying to enforce, or avoid complying with, a contract. (I handle these situations routinely as a practicing lawyer who negotiates and investigates.)  It allows you to hire a lawyer -- and the best lawyers do not work on contingency or will select carefully when they will do so.  Leverage allows you to have the ability to say "no" to a low-ball offer that may be extended to you by the other side which hopes to capitalize on your present desperation.  It allows you to hold out for the best offer, the fairest deal, whatever it is that you want. And, after all, leverage is what the big institutions use against the little guy.

Insurance companies should be cautious about making quick payouts, because of the potential for fraud.  (Of course, the banks and insurers have not put enough resources into risk management or fraud detection and in part have made their own messes, but when the federal government has implicitly promised bailouts ad infinitum it is not irrational to take advantage of the skewed playing field.)  But these financial institutions ought not to be blamed reflexively for the delays in making payouts to Sandy storm surge victims.  If government pressure becomes too great, the banks and insurers will simply respond to being forced to assume the greater risk of being defrauded by claimants, policyholders, whomever, by jacking up fees and rates on the mortgages and insurance policies they write tomorrow.

The lesson is that nothing is free.  Someone is paying.  The problem is that many people love to have someone else pay for what they want.

We are all paying for the storm damage, one way or another.  This is why sound public policy post-Sandy should strongly consider the merits of rebuilding any structures on exposed, oceanfront property at sea level. 

Eric Dixon is a practicing corporate attorney who investigates and negotiates complex disputes involving business, political and personal matters. 

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