For anyone who has lived through a natural disaster, the recent tornadoes in Central Florida and the horrific aftermath left behind — approximately 1,500 structures destroyed and 20 people killed — brings back memories of more than just the great need for disaster relief from the federal government (FEMA). It also brings back bad memories of dealing with insurance companies and very slow claims service.
It doesn’t matter if you’re living in Florida or California — coastal property is expensive and so are the insurance premiums that go with them. Back in 1994 something called “The Northridge Earthquake” (misnamed as it was) shook Los Angeles at 4:31 a.m. at a reading of over 7 on the Richter scale. Many insurance companies that WERE writing homeowner’s insurance policies pulled out of California altogether after that one.
Then a few years ago the wildfires in San Diego had the same effect — skittish insurance companies turning and running after paying off on what were expensive policy claims.
According to one recent report, insurance companies are getting skittish again — this time in Central Florida and other parts of the eastern seaboard. This does not bode well for worried homeowners who are sitting on the cusp of foreclosure. Florida had 124,721 foreclosures last year — a 2 percent increase from 2005, and a foreclosure rate of one new filing for every 59 households. The state led the country in foreclosures one month last year, and was in the top three states for total foreclosures every month of 2006, according to RealtyTrac’s U.S. Foreclosure Market Report.
Add to that the fact that many of those homeowners who bought during the past two years financed their home purchase with one of those high-risk adjustable rate mortgages that is due to reset in 2007 or 2008 — and there is something for them to worry about.
In 2002 the Florida Legislature created Citizens Property Insurance Corp. to write policies in what are considered high-risk areas of the state where homeowners couldn’t find coverage on the open market from private insurance companies. Yet some of the victims from last week’s tornadoes were uninsured nonetheless — either because premiums from the private insurance companies were too high and unaffordable, or because their insurance company cancelled the policy outright. Citizens is expecting up to 500 claims to be filed due to last week’s storms, paying out an estimated $5 million to $6 million.
What does this have to do with foreclosures? Everything!
There is an underlying problem here. Most lenders will not fund a loan for a house that is uninsured. So even if distressed homeowners wanted to refinance their way out of foreclosure they couldn’t if they don’t carry insurance on the home. If they wanted to sell the property outright, it’s going to be a problem as well because no one wants to buy a house that can’t be insured. What’s more, lenders consider failure to have homeowner’s insurance securing their loan as a default on the mortgage.
The end result of all this may turn out to be a greater number of foreclosures in the Sunshine State this year, but it is way too early to tell at this point. We’ll just have to sit tight and wait and see.
