16319.jpg

In February, the U.S. Department of Housing and Urban Development (HUD) released Mortgagee Letter 2016-02, which included a number of changes to the fees, time frames and standards mortgagees must follow in servicing and conveying a HUD property in default. One of the many topics addressed dealt with the definition of conveyance condition. In the document, the third bullet under “conveyance condition” stated, “All insured damages, including theft and vandalism, are repaired per the scope of work indicated on the insurance documents.”

Conveyance condition now includes a written parameter as to how insurable damages should be remediated.

But, what does it actually mean to repair per the scope of work indicated on the insurance documents? Is this standard different from how HUD demanded mortgagees address remediation to insurable damage prior to Mortgagee Letter 2016-02? How can the mortgagee manage the process to ensure compliance while maintaining operational efficiency?

 

Repairing per the scope of work indicated

When an insurer settles a hazard claim for insurable damage to a dwelling, the adjuster assigned to the loss will prepare a scope of work (also referred to as the adjuster’s estimate, or scope of loss). The scope of work is a detailed description of the area of the dwelling that has suffered insurable damage (routinely identified by room); a description of the item(s) to be repaired or replaced; an identification of the quantity, volume or square footage; and a breakdown of the money allotted to replace said item(s).

The breakdown of money routinely includes the adjuster’s valuation to replace or repair the item, then a deduction for depreciation, and then the actual cash value (ACV) the adjuster is providing the claimant. The scope of work will summarize all of the covered line items in the dwelling, minus any deductible, and then provide the totals in the claim settlement: replacement cost, less depreciation, and then the ACV payment. The settlement draft a servicer is accustomed to receiving represents the ACV payment.

A close examination of the adjuster’s scope of work includes a number of monetary line items, such as deductibles, overhead and profit, recoverable depreciation, items not subject to recoverable depreciation, taxes, and, occasionally, the policy allowance for expenses incurred to obtain permits. These line items are important to understand in light of the new conveyance standard to repair the damaged dwelling to the scope of work.

If the scope is followed, the items that need to be replaced must be with materials or products of like, kind and quality. “Like, kind and quality” means just that - materials and/or products that are of like, kind and quality to those that were damaged or destroyed. By repairing to the scope of work indicated on the insurance documents, the claimant can obtain the recoverable depreciation and overhead and profit outlined in the scope. Without repairing to scope using like, kind, and quality materials and products, the claimant cannot realize the benefit of the recoverable depreciation and overhead and profit.

Is this new conveyance standard different from how repairs on HUD properties were executed in the past?

HUD mandates that mortgage servicers file hazard claims on damaged properties and has maintained that damages covered under a hazard claim policy should be remediated prior to conveyance. But to what degree? In the past, many servicers could remediate insurable damages to a property - but only to the extent that property met “conveyance condition.” Accordingly, by way of example, a servicer may have neglected to replace every internal door inside a home damaged by fire even though these items may have been included in the adjuster’s scope of work and had a replacement allowance in the insurance claim settlement.

Acr5322274430771227926.jpg

The new conveyance standard as set forth in Mortgagee Letter 2016-02 requires adherence to the scope of work not only in addressing every line item, but also in the event of replacement, using materials or products of like, kind and quality. So, to use the example above, if certain internal doors in a home damaged by fire were identified in the scope of work, the doors would need to be replaced. And, the doors would need to be replaced with doors of like, kind and quality to those identified in the scope.

Practically, many scopes do not include, specifically, the types of doors that need to be used for replacement. But, many scopes will define the types of fixtures for bathrooms, countertops for kitchens, cabinets and so forth. The expectation (as defined in the monetary value allotted per the scope) is for replacement of these items or materials with that of like, kind and quality.

By expanding the conveyance condition definition to include completion of all of the line items outlined in the adjuster’s scope of work, servicers will be obligated to remediate/replace many damaged items that were not traditionally considered “conveyance” issues in the past.

 

Meeting standards while maintaining efficiencies

The new conveyance standard will compel servicers to approach hazard claim settlement and remediation in a more strategic fashion. But, there are elements within the claim settlement process that help ensure compliance while providing the economic resources to maintain operational efficiencies.

Every hazard claim settlement under a dwelling policy is subject to depreciation. The insurance company settling the loss depreciates the value of the claim because the items that need to be remediated and/or replaced have a decrease in value based on age, decay or wear and tear. The insurer will withhold money from the settlement funds unless repairs are completed. This withheld money is called the recoverable depreciation.

When a servicer repairs the property to the adjuster’s scope of work, the servicer can then claim the recoverable depreciation (if it remediates within a period of time allotted by the insurance policy). This approach has two benefits: It will limit, if not offset, the corporate contribution many servicers incur in property remediation, and by securing the recoverable depreciation, the servicer has verified that it has completed repairs pursuant to the adjuster’s scope of work.

Once a servicer completes repairs to a damaged property and a claim for the recoverable depreciation is submitted to the insurer, an adjuster will verify the work completed to the property. The adjuster will confirm that the repairs were completed to the scope of work, using materials and goods of like, kind and quality to those that were damaged/destroyed. Release of the recoverable depreciation not only offsets corporate costs, but also confirms that the servicer completed all of the work according to the adjuster’s scope.

Although the new conveyance standard appears daunting, servicers can programmatically address both costs and compliance by availing themselves to the benefits provided in the dwelling policies. When servicers address hazard claim settlement and property remediation as part of a singular process, they can meet the new HUD conveyance mandates and maintain operational efficiencies without significant increases in corporate costs.

 

Patrick Nackley is director of marketing and business development for Superior Home Services Inc., a specialty vendor focused solely on remediation of damaged FHA properties according to the insurer’s scope of work utilizing available hazard claim funds. He can be reached at patrickn@supersvcs.com.

Property Preservation

The New HUD Conveyance Standard

By Patrick Nackley

Servicers must now repair to the adjuster’s scope of loss on damaged FHA properties.

 

 

 

 

 

sm_bod

sm_bod_i

sm_bod_b_i

sm_bod_b

hyperlink

sm_cal_date

SM_text

SM_caption

sm_subhead

SM_F_subhead

 

 

 

SM_F_1stpara

 

sm_bod_last_graph

SM_last_graph

 

SM_pullquote_text

SM_pullquote_text

sm_s_h

sm_s_h1

sm_names

 

 

SM_frontoffice_1stpara

 

 

 

SM_Frontoffice_Dropcap

Sidebar Headline