Among the immediate economic impacts faced by those whose homes were destroyed or damaged by the fires in Los Angeles County will be the need to address their home mortgages. There are many issues that homeowners will need to consider, including whether to continue paying the mortgage; what to expect from your lender; how to coordinate with lenders and insurers in anticipation of payments for immediate support and in the longer term, funds for reconstruction; and what support to expect from various government agencies who provide oversight and economic support under these circumstances. As with the other matters that homeowners are facing, it is best to approach each issue with a basic understanding of the resources available and your rights and remedies. While it is not possible to provide a comprehensive listing of every issue to consider, this alert covers what we consider to be some of the fundamental issues and recommendations for proceeding.

1. Lender Communications and Initial Relief.

Reach out to your lender as soon as practicable to discuss the condition of your property and the status of your loan. Prompt and open communications with your lender will likely be met with offers of immediate relief in the form of a loan forbearance. As has been reported in the news, the major banks have already stated that they will be offering such forbearances to all affected borrowers. Note, while some lenders may approach you with offers of a loan modification, you should consider whether you have sufficient information to enter into any agreement beyond a forbearance agreement at this time. Before you can proceed with a loan modification, you will need to have a complete financial plan in place which takes into account the value of the property, the cost to rebuild or repair, sufficiency of insurance coverage, and availability of funding from the numerous government programs and those which may become available in the coming months.

2. Review Your Loan Agreements and Applicable Insurance Policies.

Before you can fully consider your longer-term approach to your mortgage, you will need to study both the loan documents and your insurance policies because the lender will be named as additional insureds on your policy and will have rights to proceeds otherwise payable to you. Again, while lenders have stated their intent to cooperate, you will want to be sure that your lender and you are on the same page as you and your insurance company regarding the use of funds provided for immediate needs (i.e., housing and expenses) as well as funds made available for design and repair or reconstruction of your home.

3. Insurance, Loan Repayment, and Reconstruction or Repair.

Many borrowers will be looking at the limits on their policies and be concerned that there will be insufficient insurance proceeds to reconstruct (or even repair) their homes. First, it is important to note that borrowers should not assume that they have inadequate coverage based on current information that has been published about building costs and timing of such construction. The adequacy of your limits needs to be addressed on a case-specific basis to determine how much it will cost to rebuild your home and whether your limits, including extended replacement cost coverage, if applicable, are adequate. Note, even if you find that you are underinsured, you will have options beyond the policy to address such shortfalls in the form of government loans and grants (i.e., See sources provided by FEMA and the California Department of Financial Protection and Innovation). At the same time, you will need to coordinate with your lender to be sure that both the lender and you are in agreement regarding the use of the insurance proceeds. The lender must allow you to use the insurance proceeds to reconstruct your home, as long as you can demonstrate that the value of the completed home will be sufficient to satisfy the debt. In other words, the lender’s interest in the collateral will not be impaired upon completion of the construction project.