Extinguishing Uncertainty: Insights for Lenders on Wildfire-Related Insurance Claims

Nichole Moore:

Welcome everyone to Geraci LLPs, extinguishing Uncertainty Insights for lenders on wildfire related insurance. My name is Nichole Moore and I'm an attorney with Geraci, L-L-C-L-L-P. Excuse me. I'll allow the other hosts to introduce themselves briefly before we get into some quick housekeeping matters and start the webinar.

Kyle Niewoehner:

My name is Kyle Niewoehner. I'm another attorney here at Geraci LLP in our Banking and Finance department, and excited to talk with you guys today about all of this recent chaos and these wildfire issues.

Ed Babtkis:

My name is Ed Babtkis, president of Ross Diversified Insurance Services. We're a national agency dealing with lender placed insurance, REO insurance, insurance for fix and flippers and insurance for those folks that own rental property.

Nichole Moore:

And as I mentioned, my name is Nicole Moore. I'm also an attorney with Geraci in the Banking and Finance department in well once again, welcome to the webinar. Some brief housekeeping matters before we get started. Number one, the webinar is being recorded and will be distributed after we conclude the webinar, so don't worry about taking notes. If you miss anything, you will receive a copy of the actual webinar. The webinar will run about 45 minutes with a question and answer period at the end. If we run a little bit longer, that's okay, but just to give you a little overview of how much time we're going to take today, we're we want this to be as informal and conversational as possible and we really want to encourage open engagement to get your questions and respond to your questions. So please drop any questions that you may have in the question and answer box, not the chat box. If we can't get to them during the webinar or we don't know the answer, we will find the answer for you or we will point you into the direction of someone who does have the answer. And last but not least, we are lawyers, but we are not necessarily your lawyers. This webinar is for informational purposes only and does not create an attorney-client relationship. Always, always, always consult your own legal counsel for advice about specific information that is geared towards your situation. So let's get started.

So let's talk about why we are here. A brief overview of the California wildfires and just their overall impact on private lenders. Cal Fire, California wildfires present a very unique challenge as we all know for our lenders that require a little bit more due diligence and insurance oversight, as well as a little bit more flexibility in our lending practices. We really want to encourage private lenders to be proactive and managing their risks, making sure they're ensuring that they have proper insurance coverage on their collateral and working closely with the borrowers. You can learn to navigate any financial illegal complexities that may arise if we have another one of these natural disasters or maybe not if more like when now in California. So what you want to look out for is one, the implications of the increased risk of risk to your collateral. We all know that wildfires pose a substantial risk to real estate collateral and you want to make sure and pay attention to the high risk zones where your collateral may be most likely to be damaged or destroyed, leading potentially to loan defaults or even diminished property values.

As lenders, you really want to assess your exposure by monitoring the geographical locations where your loan portfolio, where your loan portfolios are, and where your implementing proactive risk mitigation strategies. Secondly, there are insurance challenges that we are going to go over in this webinar. Many, many of borrowers are going to struggle to obtain affordable wildfire insurance. We are hearing every day how insurers are pulling out of California and dropping policies left and right. So we want to look for considerations where borrowers may be underinsured or completely uninsured. We're going to discuss delays in insurance payouts and disputes over the distribution of proceeds and what lenders can do and how lenders can work with borrowers to avoid any of those type of complications. We're also going to discuss the regulatory considerations and compliance risks that come along with wildfires. As we know, California is now placing or implementing much stricter building and insurance regulations for properties in wildfire prone areas, but Governor Newsom has proposed and already passed some regulation that will affect our lenders.

So we are going to discuss those as well. There is a regulation right now that is being proposed that we'll get into a little bit later that will concern what happens if a borrower defaults forbearance modifications and other workout considerations, and we'll discuss due diligence practices and best practices for our private lenders. So that's just a quick overview of what we're going to be discussing today. I just discussed the impact on the rental markets and the frequency of the, excuse me, the frequency and intensity of California wildfires. Let's discuss the geographical location. So this is particularly important because as we've seen over the past five years, California has definitely experienced the notable increase in both the frequency and the intensity of wildfires that we are seeing in the area largely attributed to climate change and prolonged drought periods. So between 2019 and 2025, there have been millions of acres that have been burned and thousands of properties and homes or fires that have been affected by these fires.

So overall, despite some variability in what's been happening in California with regard to the wildfires, the trend over the past five years indicates that there is an increase in wildfire activity in California. There really isn't a wildfire season anymore. Now wildfires happen all year round. And so this really underscores the need of our private lenders to continue to be diligent and create or implement adaptive management strategies. So if you take a look at the map that I have pulled up very quickly, these are the top 11 areas in California that are prone to wildfires as of 2024, and they're in order to relatively low to moderate, give or take. So just take a look at the map in your spare time. Like I said, we will be sending these slides out to you all and really take consideration of where your properties are located or where your borrower's properties are located and how this could potentially affect you going forward.

So now I'm going to kick it over to our in-house resident, ed Baptist. Thank you so much for joining us today. If you participated or sat in on the CMA webinar last week, you are familiar with our lovely guest. So I'm going to kick it off to you, ed, to discuss just some insurance policy essentials that our lenders should be looking out for what's happening in our landscape. I know the California Fair Plan is a big topic of discussion and how we should navigate that. So I'm going to give the floor to you now to kick off that discussion.

Ed Babtkis:

Appreciate it. Thanks. I love the introduction, overwhelmed by it. The insurance landscape, as we all know, big picture insurance carriers canceling or non-renewing policies in various areas all up and down the state. And that's been going on probably the last two years. And without going too far down the road, it's a little bit of a show gun between the insurance carriers and the regulatory environment of California and the insurance company's inability to raise rates to mitigate the risk appropriately. There's various elements that go into the insurance policies as far as rates go. And the idea, and we can go back to Prop 1 0 3, the idea was to protect the consumer from models that were geared towards insurance carriers to allow them to justify massive rate increases. The reality today is that insurance companies are truly losing money. And like any business, if you're losing money, you're not going to play by the rules that are in place.

You're going to take your ball and you're going to go elsewhere. And that's what we're seeing. We're seeing insurance carriers withdraw a lot of cancellations by carriers. We’re proactive in the Palisade region and probably Altadena as well, which further spotlights the problem that's going to continue to exist, not just in California, but quite frankly in various parts of the country that are experiencing similar climates of just dryness and creating the combustible wild rush areas and the fuel for these fires that can ignite very quickly. And then if there's any sort of winds, those embers are taken and distribute unfortunately in many surrounding areas. So what does a borrower do? What does a lender do? And right now, fair plan is grabbing all the headlines. California Fair Plan because they were a predominant insurance writer in Pacific Palisades and in the Altadena area, the Eaton area, they carried a lot of policies because that's where the wild brush is.

That's where the fuel for these fires are. That's where the canyons are, but it's not just limited there. I recently spoke to a lender that was doing a property in Newport, and I think it's not too far from, I guess it's the big Canyon golf course there. And truly people are building five to $7 million properties and you have fix and flippers or you have developers going in there, but they're going into canyon areas that are not easily accessible. You can think of Malibu and the drive from maybe the 1 0 1 to PCH. You go through that area and it's beautiful Laguna Canyon, very, very similar beautiful areas, but unfortunately very prone to a wildfire that can just take over an immediate neighborhood. And so the insurance carriers are saying great premiums or not great premiums, but either way they don't want the risk. And that's driving a lot of business to fair plan, which then takes us to what's the value of fair Plan policy?

Well, fair Plan was intended as a last resort, and I say Fair Plan, California Fair Plan, and various states have their own default insurance. We see it a lot in Florida, for example, where you have the hurricanes that come through and the major storms that come through where the state of Florida has their version of California Fair Plan, if you will. And so these state run insurance carriers are getting much more risk and the dollar values are much higher than historically they've been. You can't buy a home in California, Southern California anyhow, probably Northern California as well for less than 750 grand unless it's a condo or a real fixer upper. So you start dealing with an average price of 750,000 to 2 million, and the numbers get big in a hurry when it comes to losses. So Fair Plan is written, oh, probably double or triple the amount of business that they were intended to write, and then they're writing for larger, much larger dollar amounts than what they were intended for.

So you have this calamity, this merging of problems all occurring and then all brought under the radar by the Eaton and the Pacific Palisades fires as a consequence. Where does the money come from to fund Fair Plan? Well, some of it does come from the state of California is a foundation piece, but most of its assessments on insurance carriers that write business in the state of California. These admitted carriers, and I'll go into a real quick differential between admitted and non-admitted in a moment, but these admitted carriers have to pay into a fund, and from that is the basic money along with any state funds, along with any federal funds that may be infused into California Fair Plan when needed. And with that money, California Fair Plan buys a backstop or a reinsurance policy. So once they hit a certain amount of loss, if that point in time the reinsurance company kicks in.

So California Fair Plan I believe is going to be somewhere around 3 billion. The first a hundred million to 500 million is probably all borne by Fair Plan. From there, there may be a layer of risk and it defaults back to fair plan. And then another layer of risk and how those layers are worked out is between Fair Plan and the reinsurance companies behind them. And then in past years, FEMA would also help out in these situations. And FEMA's already helping out with Living Expenses is my understanding. Every day we see a new headline or I see a new article on Insurance Journal and I try to dive into it to see exactly what the headline is, but what's the substance in the article behind it? So that's going on with Fair Plan. That's what's going on with trying to get property insurance in hard to hard risk areas.

So I mentioned just quickly earlier admitted, non-admitted, non-admitted. Think of Lloyd's of London. I think that's probably the biggest marketplace that we go to for risks that are called specialty risks or wholesale markets risk, where they're not subject to the rate increase regulations that an Allstate or a farmer or a State Farm is. They're completely uninhibited as to what they can charge. So they look at the risk and they at the competition and they look at what they feel they need as a profit margin and the state does not control those rates. So again, these are, I'm speaking to the non-admitted insurance markets. Zurich is a big one. Munich Re is another big one. A IG has a ton of carriers. Ross Diversified uses Lloyd's of London quite a bit. Great American is another one. And a lot of the major insurance companies will have their own non-admitted carrier.

So they can take risks that they don't want and put it outside the box and therefore still say, yeah, we'll agree to insure something, but it's going to be at these rates. So what is the risk of using a non-admitted carrier? There is no state guarantee association fund that will support the claims. So if you use a non-admitted carrier that is financially very small, say asset size of a hundred to 300 million, that's not nearly enough of what you need to really work an insurance company, run an insurance company, especially if there is a catastrophic event like we've just had. So you look at the financial stability of these non-admitted carriers and that will give you your comfort level of whether you choose to use them or not. Lloyd's of London for example, was an a plus rated financial stability class 15, which means they have billions and billions and billions of dollars behind them.

So that's the advantage of using an admitted carrier. You have the state protection and the lack of insurance availability a lot of times is going to start defaulting more and more to these surplus lines markets because California Fair Plan truly does not want the risk. So that's something you're going to have to contemplate in your loan documents. Will you accept a non-admitted carrier? And if so, what is the rating of that carrier? Moody's puts out ratings, standard report, puts out ratings, and I think most people are familiar with the best guide that puts out ratings as well.

Nichole Moore:

Ed, I have a question. If the California Fair Plan becomes insolvent, how do lenders protect themselves or how is that protection different from that of a non-admitted carrier?

Ed Babtkis:

The fair plan will have some large question marks. We're all curious to see, Nicole, exactly what you're hitting the nail on the head going to keep it apolitical as best as I can. The new administration and Newsom do not have the best relationship. So is the federal government going to put funds forth to be infused into Fair Plan once they hit that point of no return is fair plan going to immediately get emergency assessments on all the admitted carriers in California to refuel if you will, to say, geez, we're hitting a level of 250 million, we're hitting a level of 200 million, we're down to 100 million, we're going to assess all the admitted carriers in California, additional assessments to get this a hundred million reserve back up to 200, back up to 400 or whatever the math, excuse me, whatever the math dictates. So I don't think California Fair Plan is going to go insolvent and I don't think that they're going to be where they don't pay claims. I think what's going to happen with Fair Plan is it's going to be a slow process and there's going to be a careful eye on how much money they have, kind of like watching the water level in a bottle go down, down, down. And once it gets to a certain threshold, there may be a timeout period where they don't pay claims for 60 or 90 days, why they refill that water bottle. But I don't see Fair Plan California Fair Plan going away and I certainly really do not project California Fair Plan going insolvent.

Nichole Moore:

What type of endorsements would you suggest for our private lenders to make sure or to include in their loan documents or when they're underwriting their loans?

Ed Babtkis:

So loss payable endorsement in the old days, a 40-year-old agency, you'll have to pardon some of my old recollections of, there used to be something called a 4 38 BFU endorsement. That was by far the best. It offered lenders protections that just is not available on the standard mortgage e clause today, but a lender's loss payable says your name Mr. Lender will appear on each claim checks, and that's the big picture. A mortgage e clause or a mortgage loss payable endorsement extends rights. For example, if the borrower lights the fire, the lender is still protected. It has certain clauses that give the lenders additional notification when a borrower's policy is going to cancel or non-renew or expire. So you always want to get a mortgagee loss payable endorsement versus just being named as an additional insured on a policy. Hopefully that gives you a little insight as to what's available.

Nichole Moore:

Yeah. So I have a question here. Kind of piggybacking off of the endorsement question or the lost payable versus just the general mortgage e endorsement, what would you suggest that Junior Loon HO will do if an insurance check? We've had this conversation, you discussed it last week as well, if the insurance check is made payable to the homeowners and only the first lien holder and leaving off the second lien holder. So we have a policy, there's a senior and a junior, but the check is only written to the senior and the borrower

Ed Babtkis:

Understood. There is no preclusion of a junior lien holder being named as a mortgagee. So I as a private money investor, an equity investor, I personally have no problem putting the carrier on notice the Allstate, the farmers, the State Farm, et cetera, fair plan that there is another lien holder, there's another mortgage E, and to get a mortgagee endorsement onto that policy so that in the event of a claim it would be the borrower, it would be the first lien holder and it would be the junior lien holder. There is nothing that stops that process from happening. Make sure you send out your request to be notified certified or email the agent, but have it done in such a way that the agent acknowledges the request. You may send that in with a loan document to validate the junior lien so that an agent doesn't feel like, who's this person just saying they want to get named onto a policy, but as a junior lien holder, you have the same rights to get named onto that chick.

Nichole Moore:

Thank you. So we have another question about payouts. I already know the answer to this because I've talked to you. So how do insurance companies pay out claims when there's a first and a second or possibly a third lender in place? How does that work? You kind of touched on it a little bit, but can you give our audience a little bit more detail on how to navigate that particular issue?

Ed Babtkis:

Sure. Just to hit rewind for a second, the junior lien holder position that we were all just discussing a few seconds ago is outside the dialogue of lender placed insurance. It holds true when we're talking about a traditional policy, whether it's admitted or non-admitted, but a policy that the borrower goes out and gets what we call a voluntary policy lender placed is a different discussion and we can go into that later on in the presentation. The question on payouts gets very dicey when there is no decision to rebuild. Now getting to what you just mentioned, Nicole, it gets very dicey if you have a first lien holder, they're going to want to be the 900 pound gorilla in the room. They have a loan for a million bucks, they're going to want to get a million dollars and say, we could care less about the borrower just bluntly speaking for a moment, and we could care less about any junior lien holders, whether it's a second, third, fourth, we don't care as long as we get paid off, that's usually the tact t I'll leave all the large lenders nameless.

I don't want phone calls or an email saying you used this inadvertently and you shouldn't have. So the large lenders are generally going after the lion's share. Now I will say in fairness to the large lenders, a lot of times things will be distributed proportionately to the amount of loan and the amount of loss. So if the large lender has a 70% loan to value loan and the junior lien has a 20% loan to value lien and a third position has 10%, a 90%, so the remains are 10%, the proceeds may be distributed in that order. But remember there's the borrower. Let's not forget the big picture here. The borrower has every right to say, I want to rebuild the property. I'm the one who bought the homeowner's policy. I'm the one who's the insured. And all you mortgage, you guys, you're just piggybacking my policy.

So the state of California, no doubt is going to protect the borrower's rights before they protect any other lien position. So especially in a catastrophic event like we just had. So if you have a borrower, just to use that analogy that's been paying all along, not delinquent on his first, second, third, et cetera and wants to rebuild their property, you're going to see the first lender, the giant lender in the room is definitely going to have a forbearance agreement, but they're only going to have that forbearance agreement assuming everybody else signs off the check, it goes to a place, an escrow company or law firm or what have you, that's going to distribute the funds as those stages of reconstruction happens. So it's going to be a little bit messy because the second and the third are not usually large enough to support a year of no payments, especially if there's a private investor and the broker's distributing those payments to a private investor. Those are going to be awkward conversations.

Nichole Moore:

Thank you. That's a perfect segue into you discussed California and regulations that are in place to protect the borrower. Now we're going to pass it over to Kyle to discuss some of what is going on in the current regulatory landscape. There are some bills that are on the proposed. There is some executive orders that have been signed and that are active right now. So Kyle, can we talk about what's going on on the regulatory landscape here in California?

Kyle Niewoehner:

Yeah, so the first thing that we do want to emphasize here is that we're going to highlight a few, but there's a lot going on and probably a lot more that will go on in terms of state, county, local responses to these fires. And ultimately when you are dealing with a specific property that was a collateral and that was affected by this, you're going to want to look at from the local level up and trying to figure out exactly what is going on in that location and what the current landscape is. A few that we wanted to highlight though, and actually assembly bill, it's actually assembly bill 2 38, so I think we'll correct that when we send out the slides. But that one is both the one that's farthest away from being actual law but also the most concerning one for our clients. So this assembly bill was introduced in January 13th.

You see there supposed to go to committee probably in mid-February. So this is only a proposed bill hasn't gone through committee yet. We would doubt that it's going to get passed in exactly the form that it is now. However, as it was introduced, this would require lenders specifically mortgage servicers, but essentially lenders to give borrowers essentially a 360 day forbearance. It's 180 days, but then it has a second 180 days simply upon request of the borrower. So I would look at that as basically 360 days and it is extremely vague. There's basically no criteria. The borrower just has to notify the servicer that they've been affected by these wildfires. And then that triggers again essentially a 360 day forbearance. So if this passed in anything like its current form, I think this would be by far the most impactful of the responses so far. So we want to notify you of that upfront, but again, not even in committee yet.

Definitely hasn't been passed and obviously subject to either completely being shot down or being significantly revised. But obviously from our perspective, from our client's perspective, it seems like a kind of shockingly broad type of bill, although it is reminiscent of some of the stuff that we saw during Covid. And so that's another thing of why we're notifying our clients about this is we have seen California do some things kind of similar to this in the past where the language just seems to be extraordinarily broad and gives borrowers some pretty extraordinary rights. So we're watching that. And then some of these other ones not quite as directly relevant in terms of lenders, but just kind of a sampling of some of the responses that are out there. Executive order N 7 25 from Governor Newsom is directed at I guess speculators or people who are going in and trying to get these properties cheaply and it prohibits unsolicited offers to purchase properties in these wildfire affected areas for less than the fair market value as of I think it's like January 6th or seventh, but basically before the fires, you can't go in and make an unsolicited offer to someone whose house has just burned down below what the market value of the property was prior to the fire.

And that certainly is something we could see is people maybe not wanting to be rebuild, wanting to sell, and this could be a real issue at really any type of property sale transaction in these areas going forward.

And then Senate Bill 8 24 is a preexisting senate bill, so this is not a new one, it was just updated by a bulletin from the California Insurance Commissioner and this is just a bill that prohibits insurers from canceling or not renewing policies in wildfire affected areas. And the law basically requires whenever there's a new state of emergency from a wildfire, they update it. And so this bulletin 20 25 1 basically takes this old law and applies it to these new wildfires. And so that's more so on the borrower side, but good to be aware because it affects the homeowner's ability to get an insurance policy or to keep an insurance policy in these wildfire zones. As Ed mentioned, I mean if you're probably quite fortunate if you even have a policy in some of these areas and this law is supposed to make it easier to try to hold onto those policies for the people who do have them, how much the insurance companies are going to abide by, that remains to be seen, but that one is out there.

And then yeah, just to reiterate, local county state level, we expect to see a lot more action going forward. And so basically you want to tread carefully on these. The reality is if you have a collateral property that has been affected by these fires, you should not expect that it's business as usual for a property that burned down, this is probably going to be a lot more complicated. There's be's just a lot more going on because of the scale of these fires. And so you are going to have to go in and expect that this is going to go slowly and there's potentially going to be some regulatory issues that you're going to have to navigate in dealing with both the insurance claims process, the rebuilding process or if you're not rebuilding. And then also probably some of these may affect houses, properties that weren't even directly in the fire, especially that assembly bill. The new one is extremely broad, doesn't require that the house actually burned down in order for a person to claim that. And so there's just a lot to navigate going forward in these areas that are affected by the fires.

Nichole Moore:

I have a couple questions for you. So one, just for clarification purposes, I'm not exactly sure who our audience is. Of course we are assuming that we have private lenders and services and brokers, but I'm not sure if everyone is a private lender or if we also have some consumer lenders and borrowers as well. Is this legislation that you just discussed, is it applicable only it applicable to consumer residential owner occupied? Does it only impact business purpose loans? Who should be concerned about the legislation that is before us now?

Kyle Niewoehner:

Well, in terms of these three specifically, the consumer versus business purpose is not relevant. I mean the Senate bill 8 24, when again that deals with homeowners insurance that that's unrelated to a loan purpose. The executive order is really trying to get at sales and I think kind of property speculation. So again, that's not real thing. And this assembly bill 2 38 makes no difference between consumer and business purpose. Again, it is just extremely broad, it just borrowers and doesn't really clarify that and also covers just mortgage servicers in general. So there may be some stuff that does pop up that may make a distinction, but I think right now it seems like there just everything is broad brush strokes and it probably is not going to matter whether your loan was business purposely.

Ed Babtkis:

Kyle, quick question or comment. For those who don't know, I make my home in Arizona and it seems like every other billboard is cash for your home and there's no catastrophes going on here, this, that or the other. I think that the fix and flip world has been buying homes, if you will. Those contractors that have the funds to support it have been going out there and have been low balling offers for a long time as a business practice probably the last five years I've seen it in my own state here in Arizona. So with this executive order in California, without trying to belabor this, are those folks now in a precarious position because their normal business practice has been to go out there and kind of low ball and then fix and flip something and as a lender or you now have to be a little bit more careful of that type of business practice.

Kyle Niewoehner:

And I think this relates to specifically that executive order N 7 25 that just kicked in as of early January, I think January 6th or seventh again is when this stuff started to happen. And it's tied to specific zip codes. So you can go look up that executive order and it lists out the zip codes that are affected. So it's going to affect only people who are making offers in those zip codes after January 6th or seventh whenever this was issued. Now having said that, if you are working in those areas and you are making offers on properties in those areas, then it absolutely is going to affect your business practice. And in terms of the lender liability, from my reading of it, it doesn't look like it would target a lender who would be financing some type of transaction. It's specifically someone who's making the offer to purchase the property seems to be the party that would be liable that would actually be violating this. So if there's something of doubt granted, I mean you don't probably want to be involved in a transaction if you can see that there's going to be a legal issue with it, even if the legal issue in question wouldn't directly target you. So I think if you do see that someone is clearly violating this, you probably don't want to get involved in that transaction, but it directly applies to people who are making offers to purchase.

Nichole Moore:

Thanks Kyle. So let's talk about just challenges and just have a discussion about how first I guess we're going to talk about how to navigate delays in the insurance claim payouts process. I do have a question here from audience member, quite a few actually that have to do with how disbursements will be done and how to be handled. Probably a question on everyone's mind after that check is cut, it's signed over who controls those funds?

Ed Babtkis:

If we're talking about loss of rents or living expenses, it's doubtful that the mortgagee's name is going to be on those checks. It would almost have to be a sizable disbursement that would be towards building the property for the mortgagee's name to appear. So I have a State Farm policy by way of example. So if I have living expenses of two grand a month and my house were to burn to the ground, I would not expect the lender's name to be on that check. I may get living expenses for 24 months or 12 months, or if I'm a property owner that's renting out the property, most lenders six months loss of rents or 12 months loss of rents. So those checks are normally made payable just to the insured that have nothing to do with the insurance proceeds as to rebuilding the property or from the hazard insurance portion of the policy as to those pieces of the puzzle, the bigger pieces of the puzzle that's going to take time.

You have adjusters who still can't get to certain properties. All they can do is look at a satellite shot and say the house was there on Tuesday and it was gone on Wednesday, and trying to do their best to reconstruct from those pictures. That's going to take a very long period of time relative to the normal claims line, which is maybe a 90 day process. This is going to be doubled, maybe tripled, depending on particularities of that loss of that property location and the accessibility and what information is provided and reconstructed. But I would certainly encourage all property owners that rent it out to get their loss of rents claim filed yesterday. And any homeowner that you may or may not be dealing with that homeowner needs to get their monthly income, excuse me, their monthly stipend that's in the policies for living expenses, those claims should be filed immediately as well.

Nichole Moore:

Sorry Kyle, I didn't mean to interject.

Kyle Niewoehner:

Yeah, no, I think

Nichole Moore:

There's a lot. I just want to tell you, there's a lot of questions here. So everyone, I'm doing my best to try to interject your questions in with the actual presentation just so that we can get to as many of them as possible. So-

Kyle Niewoehner:

Well, I think that actually was very relevant. That goes to kind of the first situation that we were going to go through here, navigating delays. And as Ed just said, I mean the expectation here would be that there's probably going to be a lot of delays. There has to be the initial damage assessment as Ed just said, that's in some cases not even started yet. And you're going to go through then the process with the insurance company and then you're going to have to have consensus with the borrower. And as we discussed earlier too, if you've got multiple lien holders on the property, you're going to have to get an agreement there of what's going to be done, how it's going to be done. If you are having an escrow holding the funds during the rebuilding process, you're going to have to have agreement on that. And Ed, we previously discussed this, but basically the insurance companies are not going to wade into the middle of that. They're going to basically make the parties who are on the policy agree amongst themselves before that's going to be dispersed. It's not like if you're a senior lender, you can just go in and say, here's what we're going to do.

Ed Babtkis:

Yes, definitely it's complicated when you have junior lien holders. Obviously the more names on that check is going to delay the process further because everyone's going to have to use the buzzword stakeholder. Every stakeholder is going to have their position, they're going to want the monies for their particular purposes, whether it's to pay off a loan, whether it's to reduce a mortgage balance, whether it's to rebuild, and the merging of those folks that are involved could get contentious. Hopefully it won't.

Kyle Niewoehner:

And then I also wanted you to talk a little bit more on the second point as well, legal disputes over coverage interpretations. And maybe we can also just discuss more broadly here that there's a lot of different potential coverage. One thing, and I'll talk about this more a little bit later, but if you haven't already, any of your properties are affected and even really properties that aren't affected by this one, you want to probably take a second look at what your policies are, what the specific coverage is, because insurers have been starting to try to rein back in the types of coverage that they're willing to give. And then if you can also talk a little bit Ed about the California Fair Plan you discussed earlier, but you've also talked with us about how the coverage that you get from California Fair Plan is generally not going to be the same as you'd get from another insurer. And this is something also for lenders be aware of on future originations. If you've got a borrower that is bringing into closing a California Fair Plan policy to cover the property, you need to take a close look at what exactly is being covered. And yeah, if you could just elaborate on that.

Ed Babtkis:

Sure. So fair plan, again, carrier of last resort, but let's get into some language that historically has been used in policies and has been omitted is time goes on. We're all familiar with the term guaranteed replacement cost, and for probably a couple of decades, that was the buzz language in every policy. It doesn't matter how much coverage you have, it doesn't matter if the property went up in value, down in value, you have a guaranteed replacement cost policy. And then we had the fires up in Napa Valley and a lot of the older homes up there burnt to the ground, and that's when the insurance carriers realized that the language in their policies was just way too broad and as a consequence, they were paying substantially more than what the policy was designed to pay and the premiums that were collected, that was very disproportionate.

So they started eliminating words, guaranteed replacement cost, and now you see replacement cost. But when you look at some of the fine print nobody does, you may find that you get up to 10% more than the face amount of the insurance coverage. So if you have a million dollar policy, maybe your coverage will go as high as 1,000,100 thousand, you might pay a little more premium and have that escalated to 20%, so you would get up to 1,000,200 thousand in the event of a claim and they call that inflation guard or escalation. There's terminology that's designed to deal with that. So there are words guaranteed replacement costs truly no longer exist, and then there's actual cash value. I'm now going to go the opposite end of the spectrum. Actual cash value policies, which a lot of fair plan policies are, so this will come into play in certain situations in both Eaton and Pacific Palisades where you're going to have depreciation and just think of your car.

You get into an accident and they would say, well, the car is nine years old and we're going to depreciate the value by 30 or 40%. So you look at depreciation on a home, it could be a 50 year life, it could be a 40 year life, it could be a 75 year life dependent on the quality of construction and when it was constructed, and there's going to be a depreciation element so that depreciation is going to play with the proceeds, especially for those people who do not rebuild roofs, for example. We're seeing that more and more where a roof has a lifetime of 15 years, a tile roof may have a lifetime of 30 years, and so if that roof is 15 or 18 years old and it's an asphalt roof, you're going to get an appreciated value. That value may only be 2,500 or 3000 bucks.

Tile roof may be it's substantially more, but the word depreciation is going to come into a lot more policies. So that's one type of coverage variance that's going to occur with fair plan. As we get into policies that are going to be written, especially business purpose now, and I know many of the audience writes business purpose loans especially to fix and flippers and many of the funds that are out there, right to folks that are doing business purpose loans, you're going to start seeing the word co-insurance more and more on these policies, and I want to go slow here for a little bit, not to make everybody an insurance expert, but just so you put a little alarm in your mind when you see the word co-insurance and don't take for granted that you think you know what it means. So for a homeowner's policy, co-insurance means as long as you insure the property for 80% or greater, the insurance company is going to pay the loss as if you've insured it for the full amount.

So a million dollar policies, as long as you maintain $800,000 of coverage or more, they're going to treat it as a replacement cost policy and there would be no co-insurance, no risk shared by the borrower in a business purpose loan, and some of these loans are two, three $4 million. You may see on the accord form co-insurance 90% or you may see a hundred percent. And what that means is that you have to ensure that property at 90% of its value or a hundred percent of its value in order to have your claim paid, whatever percentage is below that 90 or a hundred percent, the borrower bears the risk. In that case, you're going to have to make sure the borrower has the funds to make that property whole in the event of a loss, the borrower truly is participating in that risk. So co-insurance is going to be something we're going to see more and more. We're going to see sub limits of actual cash value on items like carpet, on items like roofs so that the insurance companies can start protecting themselves and not paying a full amount when something is worn out like an engine in a car with a hundred thousand miles. They're just not going to continue to pay the full value of something that has a depreciable life span to it.

And then don't forget the deductible deductibles are going to vary. They're going to increase, I think Fannie and Freddie are increasing the allowable deductible amounts. I think you're going to see fix and flippers all over the country for that matter, are already looking at policies with 25,000, you're going to see sub limits on water damage. The insurance companies are just going to start underwriting a little bit more carefully because bluntly speaking, they've all taken a beating and they're looking at ways to return to profitability.

Nichole Moore:

Thanks, ed. I know this is a question that Kyle and I have seen quite a few times now since the fires. So what happens if a borrower wants to rebuild, and this also Kyle, you can answer as well. What happens if a borrower wants to rebuild but the lender wants the borrower to use the funds to pay down the loan?

Ed Babtkis:

I think from a practical point of view, especially in California, an insurance policy is designed what is the intent of an insurance policy? The intent of that policy is to make the property what it was before the damage occurred. That's the intent of every insurance policy that's traditionally written for homeowners insurance for fix and flipper audience, it might be a little bit different, but when you look at what the intention of a policy is puts you in the same position you were before the fire occurred, it's going to be hard to argue that we're going to put the borrower in a lesser position if there's funds available from the proceeds of that policy. That's the general interpretation, the legal interpretation. I'll defer to Kyle.

Kyle Niewoehner:

Yeah, so one of the other just key practical things is, and I think, I dunno Ed if you've mentioned this already in this webinar just in our previous discussions, but if the money is not going to be used to rebuild the property in a lot of policies, you can only get cash value.

Ed Babtkis:

The actual cash value, correct.

Kyle Niewoehner:

Yeah. And so there's a bunch of stuff here. Number one, as we discussed earlier regarding kind of the regulatory environment in California and just in general, but also with these specific wildfires, I wouldn't expect that you can play hardball in these types of things. You're probably going to have to give the borrower a chance to rebuild and even if you and the borrower agree on not rebuilding like Ed was just mentioning here, that may result in you getting much less money. And so you can't necessarily just look at your policy and look at the amount that it would cover to rebuild the property and assume that you can take that same amount and just apply it to your loan because you are probably just going to get cash value if you're not rebuilding. And you obviously then have to figure out what that would actually be, how much the company would pay and how that would affect your loan.

Is that even enough to pay off your loan? And so that's, that's going to be very tricky. That's going to be something that a lot of our clients are trying to navigate right now is figuring out what is the best approach. We are also expecting, given what we've heard so far that in a lot of these areas rebuilding is going to take a long time if it happens at all. And something that we wanted to highlight for a lot of our clients that I know are using our loan document templates. When you look at your rights in our loan documents, particularly in section four in the deed of trust, you have a lot of rights as a lender in terms of requiring the borrower to rebuild within certain requirements. There's timelines that they normally have to meet and there's a bunch of specific requirements there really in the best of situations.

Those are kind of general guidelines in this particular scenario. You're really not legally going to be able to hold the borrower to all of that stuff. If they don't meet a certain timeline, then now you can just take the money and apply it to the loan for both the actual insurance reasons I already mentioned as well as just I think in the regulatory environment right now in California, they're going to be very borrower friendly, very homeowner friendly in the aftermath of these fires. And so while our documents give the lender significant rights and control over the insurance proceeds that basically the bar has to meet a lot of specific requirements in order to get the money for rebuilding or else you have the option to apply it to your loan in reality and in this situation, don't expect that you're going to be able to sort of apply the maximal extent of your rights under those loan documents.

I would look at them more so as kind of guidelines in this situation, but I think the reality is you're probably going to have to work with your borrowers to rebuild and just figure out what that timeline looks like. And if the borrower doesn't want to rebuild, I think is probably the only type of situation where you can look at just applying it to your loan because otherwise I do think that the borrower is probably going to get, if it goes to court, I would expect that they're probably going to get a lot of protection in this situation. And then it kind of flows right into our practical tips section here. You want to make sure obviously that your loan documents have not just a basic requirement that the property has to have a certain amount of property insurance, but you're going to also want the rights and responsibilities laid out for what if a casualty event happens.

As I mentioned in our loan document template, you can look at section four in the deed of trust and there's a bunch of really specific requirements and timelines for rebuilding and kind of the process that the borrower is supposed to follow. And you definitely want that in your loan documents because even if you can't fully enforce it, as I was mentioning, it still gives the lender a prerogative in terms of how this is supposed to go that the borrower has agreed to, and you're going to try to just follow that as best as you can. Whereas if you don't have that type of language in your loan documents, even at this stage where you are discussing who's going to hold the insurance proceeds, how are they going to be handled, how are they going to be dispersed? If you don't have any language in your loan documents about that, you're really kind of at the mercy of the borrower to a large extent because at least with the type of provision that we include our loan documents, you've got some right to say, Hey, loan, the insurance proceeds need to be handled in this way.

You have signed on to this and it may not be an easy process to get your bar to agree, but you've got some legal rights there that you can show to say we do have a right to kind of dictate to some extent at least how this is going to be handled. And then obviously you want to make sure upfront that you're getting Ed talked about the different types of endorsements you want to get. Ideally that Morgan G endorsement, you need to make sure that you're on the policy at least, and then you want to work with the borrowers to ensure the adequate coverage levels really go over those policies with a fine tooth comb right now, especially when you're closing new loans and make sure that you see, look at the co-insurance, look at the coverage levels. If you've got a fair plan, you really need to, and you may want to consult with someone like Ed or his company on, Hey, what is this policy really, really covering?

Because it's really absolutely vital right now if you're working in southern and central California, this is I guess never been more important. And then I already discussed, I think the third point on there, you want your loan documents to have a clear process for claims and proceed distributions, even if you don't get to follow the letter of the law in terms of what your process is, you want that in there because you can at least say, Hey, here's how this is supposed to work. And hopefully you can follow that pretty closely and set up an escrow where you as a lender are involved and can oversee the process and make sure that the work, the rebuilding is being done properly being and that the disbursements are being handled properly. You want those rights in your loan documents. And then Nicole talked to us up front in kind of the wildfire zones.

You just want to stay informed about that. And at this point, Southern California just is a wildfire zone, and so you just are in that and it's almost like you already just know by virtue of this part of the country that you have this issue, but you just want to make sure you stay up to date on that stuff. And I think also, like Ed mentioned, there was even some really local issues sometimes on this where you want to be aware of, you want to be aware of the surrounding area of your property, not even necessarily just that neighborhood, but the neighborhoods around it and see is there something around here that is a prime kind of wildfire origin type of zone, and then potential state and local issues. As I mentioned previously, there's just a lot of activity right now that bears watching and not even just the high level stuff that we were talking about. Again, local communities I would expect are going to be also addressing this on the city level as well as obviously the county level. And so there's multiple layers of government that you're going to probably run into in dealing with these wildfires.

Ed Babtkis:

One thing I'll just touch upon on a lot of the local issues is some of the building codes and ordinances are suspended, meaning that if something was put in place maybe two or three years ago, but the house was built 30 years ago, they may be suspending in certain areas of Alta Nina, areas of Pacific Palisades, the enforcement of those building codes or building ordinances that would just make it cost prohibitive for an older home that burnt down to try to be rebuilt with the coverage limits. So the local ordinances in certain situations are going to be very impactful where there's not going to be any leverage or room to play with while other, depending where the specific property is located, there may be more leeway in not having to build to the current code but able to build to whatever the code was within a five-year period.

The only other thing I'll add to Kyle's comments is because it came up in a phone call that I recently had, and it was tricky that these are all going to be tricky slippery slope stuff. So just bear that in mind just because you make a business purpose loan. If I'm a fix and flipper and I have enough money on the line, I may suddenly decide that no is from a public facing point of view, I'm going to live in that house I was originally going to fix and flip it, but I've decided I'm going to build this beautiful home and I'm going to live in it so that they're treated more like a homeowner as it pertains to all the leeway that's been given by Fannie and Freddie already to homeowners versus fix and flippers. There's a real distinction there. So be careful with your audience when you negotiate what you're going to be able to do, what you're going to be able to work with, the forbearance, the timelines of the claim process. You don't want your fix and flipper to turn on you because you put him into such a tight corner. With that, Nicole, key takeaways all you.

Nichole Moore:

Thank you. Thank you both. That was amazing. So I know we're pushing up if we're not past time, so just quickly some key takeaways before we get into the question and answer, because as you can see, we have a lot of questions and I really do want to get to as many of them as possible. Look into your insurance. Insurance. We all know plays a crucial role in protecting your collateral. Make sure you're maintaining proactive communication with your borrowers. And as folks have mentioned, there may be additional insured, additional lien holders, so just make sure you're maintaining communications with all parties who may be affected by this. And then just continue to monitor the wildfire landscape. We are doing our best on our end at Jusi to monitor the regulations and try to keep everyone up to date on what's going on. As Kyle previously mentioned, there are quite a few assembly bills that have been proposed and are probably in the process of being revised before they go, before the assembly on February 15th.

So we will do our best to try to keep everyone up to date on those issues. Here's our information, feel free to reach out to us if you have any questions. For those of you who do not use our loan documents, shameless plug, we advise you to use our loan documents, but come to us. We may be able to provide you some services or information, even if you do not. We definitely want to take a look at your loss provisions to make sure that you are adequately covered, if not now, at least going forward in the future. And last before we get to the q and a. We wanted to provide you all with some resources if you want to scan these, these are just general information for resources for borrowers. Maybe not so much for lenders, but just general information of what's going on in California, specifically in Los Angeles and Ventura County right now that may be beneficial.

Even if it's not beneficial to you in your business, it may be beneficial to you or one of your loved ones or someone in their personal and private life. So if you want to take a screenshot of these, I'll leave this up for a minute and let's get to the questions. So some of these questions have been asked and answered, but let's start with this first one. This is going to most likely go Ed Ed. How do you ensure that a lender is listed as a lender's loss payee instead of a loss payee or mortgage E. Many insurance companies don't seem to offer a loss lender's loss payee designation and seem to treat lost payee and mortgage E. The same

Ed Babtkis:

They do. And again, in the old days, if you will, a 4 38 BFU endorsement was the best endorsement you could get as a mortgage E. But on the Accord form, there's lenders loss payable box and there's a mortgage E box. So if you are in the process of closing your loan, which obviously you all are, go back to the agent. If they just check a lender's loss payable box, insist on a mortgage e clause, I think it's at the bottom of the accord form where the box is, and you list of course the appropriate mortgage e clause, and that's what you want. That's what you want on the Accord form. And that way when the deck page, the certificate, if you will of insurance comes in, it will have you listed appropriately.

Nichole Moore:

Thank you. You addressed this earlier. Maybe someone hopped on a little bit later or maybe we just talked about this, but if the second lien holder is listed as a mortgagee on the insurance policy, will the second lien holder also be listed on the check? The proceeds check?

Ed Babtkis:

Absolutely. And if not, you have every case, every reason to call up GI Rossi and have them put the carrier on notice that you were listed on the policy and your name was not listed on the check, and that will usually get their respect and attention very quickly.

Nichole Moore:

Okay, so this is definitely for you, ed. You did mention 4 3 8 BFU. Brett is saying that some carriers don't offer 4 3 8 BFU, but they do offer equivalent language. How can you determine if the equivalent language is sufficient? And also many borrowers insurance agents are unfamiliar with this clause, so what can we do to better communicate with agents to make sure that the lenders lost payable coverage is in place?

Ed Babtkis:

I think that's a great question, especially if you're making loans in different states. The requirements on the mortgage e clause vary. The insurance industry got together because they wanted to do away with the ambiguity of various endorsements in different states and they started putting mortgage E clause language in the actual policy itself, and that's probably a good starting point. The mortgage e clause and the policy again gives extra protection to the lenders as far as notification when a policy expires, if it's canceled for non-payment of premium, it gives extra time periods for a lender to deal with it. It also precludes certain claims from being denied. For example, if the borrower I mentioned earlier is an arsonist and lights fire to the property or damages the property himself and then tries to fraudulently put in a claim, the borrower's claim may be denied, but the lender's claim will be honored, and that's really what you're looking for in the mortgage clause protections.

Nichole Moore:

Now, just full transparency and to be candid, I personally do not know the answer to this next question, but can either Ed you or Kyle speak to environmental requirements post-fire for homeowners impacted Many of the Palisades homes were built prior to 1970 and hearing that EPA search will be required to rebuild, I mean I know they're attempting to streamline the process and the requirements. I'm not sure if either of you can speak to any environmental requirements.

Ed Babtkis:

Kyle, if you want first blush, go for it.

Kyle Niewoehner:

Yeah, I don't know anything personally about this either. I think though that there's probably a lot more to come on that because I would guess that there's probably going to be some lobbying and perhaps some battles over that because I think we've already heard some discussions that some of that stuff needs to be waived. How much of it will be waived? I don't know. I think there's probably going to be some political maneuvering over a lot of those issues at this point.

Ed Babtkis:

I think the big thing just to touch upon is we may be familiar with the word asbestos, and asbestos is still in a lot of older homes all over southern California. Homes that were built in the sixties and seventies and what have you, probably 72 or somewhere around there is where it got eliminated is building material obviously because of the cancer risk. So asbestos is not going to be allowed to be put back in these homes and the installation that's going to be used is going to have to be environmentally safe. I think the ground itself, we used to do a toxic searches way back when we were insuring a lot of commercial property that we're property that were formerly dry cleaners or gas stations or that type of thing. So you'd run an environmental report so you could see what was there historically. I think the big concern here is going to be the ash itself. You have tons and tons and tons of ash all over Pacific Palisades and the content of that ash I think is going to be a subject of discussion. But outside of that, I don't know much more than anybody else.

Nichole Moore:

Thanks. So Ed, you spoke about the differences between an admitted and non-admitted carriers earlier. One of our audience members would like to know the best way to assess the financial integrity of non-admitted carriers.

Ed Babtkis:

The best book will still publish. Best guide will still publish non-admitted financial strength and a designated an A BCD rating. Those ratings are designed, the alpha ratings are designed to let you know how well the company is run, what the expectations are and the profitability to some degree. The financial category tells you how much money they got in the bank, if you will, how much surplus reserves they carry. So the higher the number one through 15, the higher the number the better. And you have standard and pores and you have Moody's that also provide ratings for admitted and non-admitted carriers. In California, there's something called the Leslie List, LA SLI, which is a list of surplus lines insurance carriers, and I think on a national level, they use the word alien to identify something as a non-admitted carrier, but the rating agencies will be able to give you, and that should just be a quick Google search. You're not looking at it spending dollars to find out the financial strength of any particular carrier, whether they're admitted or not admitted.

Nichole Moore:

There's a question. Someone had a question pertaining to bank leverage in warehouse lines. If you could shoot me an email on that. There is some legislation out there that applies to the major banks. I believe it's maybe about 500 of the major banks, but if you shoot me an email on that, we can have a further discussion about bank leverage and how that affects warehouse lines. So in the event of a total loss, will the insurance check be sent directly? I think we touched on this already, but who will the insurance check sent directly to the borrower or to the first lien holder?

Ed Babtkis:

I would think even though both names will appear, the mailing address is valid. I mean, if the place is burnt down, it's going to be awfully hard to send a check anywhere. I would think the lender is going to be the first place any proceeds go to, but again, with the borrower's name on that check.

Nichole Moore:

Okay, so we have a question here. One of our cross-collateralized properties in Altadena has been burned completely, which was the primary residence of our borrower where the borrower's payments were impounded for the initial 12 months on the main collateral property, which is an industrial property, our loan being in second position on both collateral properties and the loans being in current status. Does this particular lender have to place the insurance, have to place the insurance company of the borrower's primary property on notice, primary residence on notice? And I left out the last part of that question, what language is proper because you can reach out to Kyle and I regarding legal language, but I don't know, ed, does that make sense to you? Do you have an answer to that?

Ed Babtkis:

The only answer I would default to is if you are a mortgagee and you cross collateralized, so you're a mortgagee, then you should be endorsed onto that policy and your name should be on that check along with the first, along with the borrower.

Kyle Niewoehner:

Yeah, I think that's also, that's a very specific situation, so if you want to go ahead and reach out to us separately if you want to discuss that further. It sounds like there's a lot of different facts there, but yeah, I mean Ed's advice generally I think is maybe that's all they need, but yeah, they should, if they're mortgagey, they should be involved.

Nichole Moore:

What guarantees, if any, are in place for the borrower to use funds to actually rebuild and not just run away with the money? I would assume that it would be in your loan documents, but Kyle,

Kyle Niewoehner:

Well, this is part of why you need to be a mortgagee. You need to be on the policy because that means you're on the check, which means the borrower can't run off with the money because they need you to sign in order to cash it. And so that's why you need to be on the policy to start with. And then you need the language in your loan documents that gives you the right to oversee the process, oversee where the money is being held in escrow, et cetera. So you really want both of those components in place so that you have the right to have a say in where the money goes, how it's being used, and having an escrow or some type of controlled disbursement strategy that ensures that the money is actually going to construction.

Nichole Moore:

The next question involves whether lenders are still legally entitled to payments during this time. And just really quickly, I'm going to just remind you that Kyle spoke about AB 2 38, AB 2 38 regarding the, I believe the forbearances that has not yet been passed. So right now, lenders are still legally entitled to payments. I don't know if Kyle has anything else to add, but I think that's pretty,

Kyle Niewoehner:

Yeah, yeah, I think that's still the case, and if you're not making payments on the loan, you are definitely leaving yourself open to various forms of recourse from the lender at that point, and then how that all gets out later. I mean, I think if you're a borrower, you can make payments, you want to still be making payments because you shouldn't just count on being completely bailed out by some future government action on that. So if you can't make payments, obviously that's tough, but if you can, you should definitely still be making payments.

Ed Babtkis:

I'm just going to comment that there's been about four or 500 lenders that have signed something. I know I saw it in the insurance journal, and I think I saw it on the California department of, excuse me, insurance website where they're going into a forbearance period for a minimum of 90 days just to let people sort out exactly what's going on. Being a little familiar with LA County, I am not the attorney. I'm not the generosity on this one, but I wouldn't rush to put somebody in foreclosure. I'll just leave it at that.

Kyle Niewoehner:

True, true. That's definitely the case. I did see that as well, ed, and now I didn't look at the whole list, but I think that was a lot of banks and bigger lenders, so I don't know. I kind of doubt a lot of our clients were in that, but

Ed Babtkis:

I agree it was primarily institutional,

Kyle Niewoehner:

But that may also be something that like Ed said, you shouldn't be rushing to foreclosure on, especially if you have a property that actually burned down that's in la, you're not going to look good if you end up in court and you immediately rush to foreclose on somebody whose house has burned down.

Nichole Moore:

Yeah, so after checks, the proceeds have been dispersed. What happens, ed? Are lenders required to hold funds in a custodial account? Does that account bear interest? If so, well, how much interest really will probably determine on the actual underlying loan agreement, but can you provide any color on what happens after proceeds check is dispersed?

Ed Babtkis:

I think that's an agreement between the lender and the borrower. Think of it almost like a course of construction loan. They will get together and decide who holds the funds and what triggers the release of certain funds along the process. I don't really have anything further to add than that.

Kyle Niewoehner:

I think a lot of that then does come, your loan documents do start to come into play to some extent. I mean, you're going to have to negotiate with the borrow over it, but our loan documents would indicate that the full proceeds are going to get held and then the borrower has to submit a plan to you for the reconstruction of the property, and you then have, are holding the proceeds or probably a third party is going to hold the proceeds in escrow and they are going to be dispersed, like I said, over course of construction. And that's going to also though is one of the reasons why you need to have this type of language in your loan documents because otherwise you're kind of just negotiating out of thin air with the borrower over that. In terms of, I think the last part of that question though, you don't have to make some initial disbursement to them, especially, well, particularly if you have the kind of loan documents like ours. The whole proceeds should be then just getting held to fund reconstruction.

Nichole Moore:

Does insurance since fire insurance or doesn't? This is the question, doesn't fire insurance cover the replacement costs? And so if so, why does the value of the home coming to play? I mean, I know based on the conversation that Kyle had, some of why we discussed the value of the home had to do with the legislation that either has been passed or has been proposed to protect borrowers. But are there any other considerations on why the value of the home will come into play rather than just the replacement cost that's covered by the fire insurance?

Ed Babtkis:

If I'm understanding the question correctly, different insurance companies use various software models that are current up until the last 90 or 180 days. We use something called Marshall Swift Beck, it's owned by CoreLogic. And what these do is they look at the type of construction it is. These are primarily million dollar homes that burnt down. So you're looking at a high end type of construction, but it also takes into account the age of the home because not every home was built five years ago and is a million dollar home. As you mentioned earlier, there are a lot of homes built in the or even prior, that burnt down in this situation. But you have to have a starting point. So you have the value of the land, and in this case here in Pacific Palisades and Altadena, the value of the land is very high.

Will it remain high because it might take three to five years to rebuild. Is that going to be a big hit on the land value? Is it going to remain high because of some of these toxic concerns or environmental concerns that were brought up earlier in the webinar? Is it going to be high because debris removal alone is going to take six months to get all that stuff out of there unless unfortunately we have more mudslides or things of that nature, which is a whole nother can of worms. So the value of the home conceptually is what's the square footage, what's the quality of construction, and what does the insurance company think it will cost to rebuild the home? And I started, the way that I started is because a lot of people confuse the value of the home with the land value in there.

And the reality is if you have a 3000 square foot home and it's a Home Depot house, it may be 150 bucks a square foot, it may cost you 450, 500,000 to rebuild. If it's a beautiful custom home, it could cost you 800 to 1200 to rebuild. If it's on a hillside, which many of these homes were. Now you have excavation costs, but that's not going to be covered by your insurance policy. So you have to look at the whole concept again of the insurance looks at the square footage of the home, what's it cost to replace that square footage? Not necessarily including architectural plans, not necessarily including permits, not necessarily including the cost of retaining walls. So that's why the value can be somewhat arbitrary when you use the word value and that's why I'm hedging a little bit in the response.

Nichole Moore:

Thanks, Ed. This is a good question. Can a private lender self-insure alone with a lender placed insurance policy? And I don't know if this is means forced place insurance. I'm not exactly sure. I'm not exactly

Kyle Niewoehner:

Sure. Yeah, certainly you can do a force place policy if your borrower's coverage expires. This also though brings to mind that we actually had a specific situation that we talked to Ed about I think a couple of weeks ago where a lender had done a policy on top of the homeowner's policy because they didn't think the homeowner's policy had enough coverage. And it is possible to do that. And we discussed that with Ed and maybe you can talk about that a little bit, ed, but the insurance companies then essentially are going to talk to each other and probably split the coverage ultimately

Ed Babtkis:

Depends on the type of policy. So forced order, forced order policy, the intent of that policy is to be used only when the borrower's policy expires, not necessarily if a borrower's policy is insufficient, but we have seen it used in those search circumstances on a limited basis. The language in any lender place policy is that we are excess. The lender place policy is excess above and beyond or over any policy that's enforced written with the borrower's name on the insured property. So let's say fair plan maxes out, I forget the recent fair plan limits, but I know that they've been raised and let's say they max out at 3 million and the home's worth 4 million and all they can get is a $3 million policy with fair plan, then yeah, you can force place for that million dollar difference so that you have a total of $4 million insurance and on that million dollar policy, you're going to be the named insured on it, not the borrower.

So if that's the nature of the question, then yes, you can do that. If the borrower has a policy through State Farm and State Farm says it's worth 800,000 as far as the reconstruction cost or the replacement cost of the policy, if you're going to put anything else on there, the first thing I do is caution you is to make sure it's not an advancement, even though that's really more of a rosy field of question, depending on the language and the loan document, because a borrower has a policy, why are you forced placing and asking the borrower to pay for the forced place? It's contradictory to what the force place policy is all about. Again, if the borrower's policy is deficient on the amount of coverage, then you have cause perhaps to order excess for that deficiency, but the primary policy is going to pay first.

Nichole Moore:

Okay. We only have about two minutes left and we have a lot more questions. So because we have Ed here, I'm just going to skip to the insurance specific questions. If you have questions more about maturity dates, lightning docs updates, if you have questions about what lenders should do and best practices and how to protect yourself, please, please reach out to Kyle and I and we will do our best to assist you or point you into the direction of someone who can but quickly on insurance. So someone had a question Ed about saying, Brett, the Accord form has check boxes for lenders, loss payable, loss payee, and mortgagee. Can we insist all three be checked? If not, which provides the strongest protection?

Ed Babtkis:

The mortgagee should provide the strongest protection, and that's the one I would be concerned with. There's no doubt that you're the lender and that the mortgage e clause language and the policy is going to speak to your interest.

Nichole Moore:

Okay. What if the insurance policy only covers 80% of your loan because of cash value and the borrower has decided not to rebuild? Can you recover the 20% from the land?

Ed Babtkis:

That's up to the value of the property and the loan that you've made. That's a little too ambiguous for me to dive into because land value obviously is relevant to the location.

Nichole Moore:

Yeah. Okay. Well, I want to thank Ed for joining us. We really, really appreciate it. One last disclaimer. While we are lawyers, we are not your lawyer, so please make sure that you consult your attorney based on your own specific information. If you do not have an attorney, jar Rossi is here to serve you. I don't know if Kyle or Ed have any closing words before we end the webinar.

Ed Babtkis:

Well, I'm just hoping that everybody stayed awake and I want to thank Nicole and Kyle for having me on.

Kyle Niewoehner:

Yeah, I just say really appreciate you coming on Ed. Really, really appreciate your expertise and obviously we'd encourage our clients to reach out to you with any type of insurance questions. Obviously, you have a tremendous amount of experience and really appreciate you being here today.

Ed Babtkis:

Thank you.

Nichole Moore:

All right, well with that we're going to sign off everyone. We will circulate the PowerPoint slides after the webinar and thank you all for attending. We greatly appreciate it. Bye.