August 24th, 2021
A question often arises among mortgage lenders concerned about uninsured real estate property damage: What is the difference between Mortgage Impairment Policy and Blanket Mortgage Hazard insurance coverage?
Traditionally, there had a been a lot difference in the two forms of coverage, but times have changed, and these days a Mortgage Impairment Policy can be endorsed to give coverage similar to that of a Blanket Mortgage Hazard insurance policy.
First let’s talk about what is similar: Both a Mortgage Impairment Policy and Blanket Mortgage Hazard policy are designed to protect a mortgage lender from an uninsured loss to real estate property collateral. Both can used to protect the lender from loss due to an uninsured damage to a residential or a commercial real estate property securing a mortgage loan.
Both policies cover the typical hazards of fire and windstorm. Neither policy covers flood to a property in a flood zone. However, the Mortgage Impairment Policy offers limited coverage for flood damage to a property not in a designated flood zone. Bear in mind, whichever policy you choose, you will still need to keep track of flood insurance for real estate properties sited within flood zones, and you’re required by financial institution regulations to force-place a flood policy when necessary.
Let’s look at the simpler policy first: Blanket Mortgage Hazard insurance. This policy essentially gives the exact same broad coverage as force-placed mortgage hazard insurance; but without having to track insurance and without having to force-place coverage. The annual premium is rated on the total outstanding balance of the portfolio: residential first mortgage, second-mortgage or HELOC loans, and mortgaged commercial real estate portfolio; all may be covered on a full blanket basis.
Note: Any lender making HELOC (equity loans) should definitely purchase a blanket mortgage hazard policy for its second mortgage and HELOC loan portfolio. It’s both great protection and a very cost-effective solution.
A Mortgage Impairment Policy is written in three different forms:
‘Impairment’ is an important word when it comes to a Mortgage Impairment policy coverage: Generally speaking, the claim is paid only after foreclosure has been completed; and it’s clear that the property damage will cause the lender to write-off all or part of its loan balance. Blanket Mortgage Hazard responds more quickly, by paying the lender directly for the appraised property damage that has occurred to an uninsured mortgage property.
Also, the Mortgage Impairment Policy covers a number of other miscellaneous servicing errors and omissions. (We’ll review those in a follow-up piece.)
One last note: Whether the lender chooses to buy a Blanket Mortgage Hazard Policy or a Mortgage Impairment Policy, the lender will still need to force-place on its foreclosed properties: REO (real estate owned) properties. Upon foreclosure, the lender owns the property, so the lender will want to protect both the property itself from damage; but also, the lender will want to protect themselves as owner from liability claims. This is accomplished by placing a Commercial General Liability (CGL) policy as of the date of foreclosure.