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					                                                                                       Local: (512) 501-4010
                                                                                    Toll-Free: (800) 299-8994
                                                                                www.InsuranceForInvestors.com

                                                                                      Last Revised March 2012



                            FAQ‟S About Insuring Wrap-Around Mortgages


                       ** Click on a Question Below In Order To Jump To the Answer **


Q1.    Why should I purchase my policy from InsuranceForInvestors.com rather than another agent?

Q2.    What do the terms „Material Misrepresentation‟, „Concealment‟, and „Insurable Interest‟ mean when
       purchasing an insurance policy and how do they affect insurance in a wraparound mortgage transaction?

Q3.    Can an insurance agent send a copy of the insurance to the underlying mortgagee with the seller’s name
       listed instead of the buyer‟s name so that the underlying mortgagee isn‟t „tipped off‟ about the sale of the
       property?

Q4.    What‟s the difference between the “Named Insured”, an “Additional Insured”, and “Additional Interest”, and
       a “Loss Payee”, and “Mortgagee”?

Q5.    How should the seller be listed on the insurance policy?

Q6.    What‟s the difference between a “Wrap-Around” mortgage and a “Subject-To” sale?

Q7.    How concerned should the buyer and seller be about the price of the new insurance?

Q8.    Why is the buyer‟s insurance often more expensive than the seller‟s previous insurance?

Q9.    What is an „insurance score‟ and is my credit (FICO) score used as a factor in determining insurance
       premiums?

Q10.   Do I need to provide my social security number to get a quote?

Q11.   Should the seller keep his or her insurance in place?

Q12.   Why do real estate attorneys and some other insurance agents provide different insurance-related
       information than what InsuranceForInvestors.com provides and who is right?

Q13.   Is there any difference between policies offered from different companies?

Q14.   Can the new buyer‟s insurance premium be paid from the seller‟s existing escrow account with the
       underlying mortgagee?

Q15.   Why is insurance so hard to deal with when working with “wrap” mortgages?

Q16.   Why is there such a difference in price among the different quotes I am getting?

Q17.   What happens if the new buyer has to file a claim?

Q18.   How should insurance be managed when setting up the servicing for a „wrap‟ mortgage?

Q19.   What are the different payment options for insurance premiums?




                                        By Investors. For Investors.
                                       www.InsuranceForInvestors.com
                                                                                           Local: (512) 501-4010
                                                                                        Toll-Free: (800) 299-8994
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                                                                                          Last Revised March 2012



                             FAQ‟S About Insuring Wrap-Around Mortgages


                        ** Click on a Question Below In Order To Jump To the Answer **


Q20.   Will the underlying lender be notified of the new insurance and will this inform them that the property has
       been transferred?

Q21.   Will the underlying lender or mortgagee call the loan due if they find out the property has been transferred?

Q22.   Can the seller just transfer his or her insurance policy to the new buyer?

Q23.   What happens if the buyer‟s new insurance cancels for non-payment of premium?

Q24.   Can the seller of the property make changes to the buyer‟s insurance policy?

Q25.   If the buyer‟s insurance is not paid for using the seller‟s existing escrow account with the underlying
       mortgagee, what happens to the money in that account?

Q26.   What are „surplus lines‟ companies and why is the buyer‟s policy financed?

Q27.   Why is information about the property‟s construction and physical characteristics needed for a quote and
       how is the property‟s replacement cost determined?

Q28.   Why will InsuranceForInvestors.com not prepare quotes with just minimal information?

Q29.   What is the difference between replacement cost and actual cash value?

Q30.   Why the property‟s replacement or reconstruction is cost different than the appraised value or sales price?

Q31.   What are some of the most common mistakes and/or bad pieces of advice that InsuranceForInvestors.com
       most often sees regarding insurance for wrap-around mortgages?




                                        By Investors. For Investors.
                                        www.InsuranceForInvestors.com
                                                                                           Local: (512) 501-4010
                                                                                        Toll-Free: (800) 299-8994
                                                                                    www.InsuranceForInvestors.com

                                                                                          Last Revised March 2012



                               FAQ‟S About Insuring Wrap-Around Mortgages




 Why Should I Purchase My Insurance From InsuranceForInvestors.com?                                                 TOP


This is a good question and one that we are happy to answer. The fact is that unlike other insurance brokers and
agencies in the country, InsuranceForInvestors.com was actually founded and is managed by active real estate
investors with years of first-hand experience in seller-financing, property „rehabs‟ and „flips‟, and new construction –
both residential and commercial. We „get it‟ with regards to investment property, investing strategies, and other
related areas of concern. The importance of attention to detail and accuracy when quoting and issuing
insurance policies cannot be overstated, especially when dealing with unique seller-financing situations or
investor-related properties. Properly issuing insurance in investor-related situations such as with wrap-around
mortgages requires detailed knowledge and experience in insurance law, contract law, real estate investing, and
forward-thinking risk management. Not just quoting the wrong policy at the cheapest price. With this in mind, most
typical insurance agents are simply salespeople – not experienced investor/consultants – and they often sell
whatever „one-size-fits-all‟ policy the company they work for offers and few even understand the real difference
between an HO-A, an HOB, and an HO3 policy. While it may not matter to them – it should definitely matter to you.
In our experience, more often than not, policies are issued incorrectly with the (1) wrong policy type (2) improper
coverages (3) misrepresented or concealed information (4) and without consideration for the „bigger picture‟ of what
may happen in the future when a claim is filed and the insurance company learns that the policy was either issued
incorrectly or should have never been issued in the first place.


 What Do The Terms „Material Misrepresentation‟, „Concealment‟, and „Insurable Interest‟ Mean
                                                                                                                    TOP
 When Purchasing Insurance and How Do They Affect a Wrap-Around Mortgage Transaction?


This is the first question to address since it is the most relevant to issues involving insurance for properties
purchased by a wraparound mortgage and these are the most common issues regularly (and often intentionally)
committed by licensed insurance agents, transaction coordinators, and Realtors. Each and every insurance policy
issued, regardless of the company, contains a clause or policy condition specifically referencing “Material
Misrepresentation and Concealment”. In addition, the principal of „insurable interest‟ is one of the underlying
principals and foundations to all insurance contracts – regardless of the type of property or risk being insured.

Material Misrepresentation - To begin, material misrepresentation is the legal term used to describe the situation
in which an insurance applicant (ie: the new property buyer) either withholds information or falsely reports
information that would otherwise have an impact on the decision as to whether or not to issue (or how to issue) a
policy being offered by the insurance company. Examples of this commonly include:

       The seller keeping his or her homeowner’s policy and intentionally misleading the issuing company. These
        policies are intended for „owner occupied primary and secondary residences‟ only. In a wraparound
        mortgage sale, when the seller transfers title to the property to the new buyer, he or she has transferred
        legal ownership and no longer has an „insurable interest‟ in the property.

       Stating that the previous owner (seller) is also a ‘co-applicant’ or ‘additional named insured’ on the
        application in order to „fool the underlying bank or lender‟ when in fact he or she has actually transferred
        legal title to the property and has no insurable interest is a „material misrepresentation‟.




                                          By Investors. For Investors.
                                         www.InsuranceForInvestors.com
                                                                                           Local: (512) 501-4010
                                                                                        Toll-Free: (800) 299-8994
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                                                                                           Last Revised March 2012



                               FAQ‟S About Insuring Wrap-Around Mortgages



       Stating on an insurance application that the applicant has had no foreclosure or bankruptcy in the past five
        years when he or she has actually experienced one of those unfortunate issues in that period of time. This
        is also a „material misrepresentation‟.

All of the issues above relate directly to the insurance company‟s underwriting guidelines and ability and/or
willingness to issue coverage. As you may guess, some material misrepresentations are more severe than others
and may well result in more severe consequences if discovered.

Since all contracts in the United States are bound by the principle of uberrimae fidei (Latin for "utmost good faith"
or, more literally, "most abundant faith"), no legal insurance contract exists if you commit an act of material
misrepresentation. This means that the insurance company has the legal right to terminate your insurance policy
retroactive to the date of its inception. If that were to happen a ten months after the policy was issued (after you
filed a claim for example), insurance and contract law would allow the company to „flat cancel‟ the policy and they
would have the legal right to deny any and all claims, and you would be considered to have been uninsured for that
entire period of time – which means the underlying mortgage lender would also have the resulting legal right under
the terms of the Promissory Note with the original borrower (ie: seller) to obtain „forced placed‟ insurance at a much
higher premium and add the amount of the premium to the payoff balance of the loan or charge the original
borrower (seller) directly.

Concealment – Similar to and often associated with material misrepresentation, concealment refers to the
“fraudulent failure to reveal information which one or more parties knows and is aware that in good faith he/she
should communicate to another.” Like material misrepresentation, the insurance company has the legal right to „flat
cancel‟ any insurance contract determined to have been issued using fraudulent or „concealed‟ information.

Insurable Interest – This term is somewhat difficult to define without using some degree of „legalese‟ in the
explanation, but an Insurable interest exists whenever an insured party derives a financial or other kind of benefit
from the continuous existence of an insured object. In other words, an insurable interest means that the policy
holder must stand to suffer a direct financial loss if an event or loss (against which the insurance coverage was
purchased) occurs. A person has an insurable interest in something when loss-of or damage-to that thing would
cause the person to suffer a direct financial loss or other kind of loss. Typically, insurable interest is established by
ownership or possession. For example, people have insurable interests in their own homes and vehicles, but not in
their neighbors' homes.


 Can an insurance agent send a copy of the insurance to the underlying mortgagee with the
 seller’s name listed instead of the buyer‟s name so that the underlying mortgagee isn‟t „tipped                     TOP
 off‟ about the sale of the property and we can get this deal done?


NO. Although the agent may not be misleading the insurance company itself, he or she is committing an intentional
fraudulent act with regards to another insured party in the insurance contract (the mortgagee / loss payee). Not only
is this an obvious violation of professional ethics and trust, but any agent performing this activity may well be
reprimanded by the state‟s department of insurance, including fines, suspension of his or her license, and other
consequences such as termination of carrier contracts.




                                          By Investors. For Investors.
                                          www.InsuranceForInvestors.com
                                                                                             Local: (512) 501-4010
                                                                                          Toll-Free: (800) 299-8994
                                                                                      www.InsuranceForInvestors.com

                                                                                            Last Revised March 2012



                               FAQ‟S About Insuring Wrap-Around Mortgages



 What‟s the difference between the “Named Insured”, an “Additional Insured”, and “Additional
                                                                                                                      TOP
 Interest”, and a “Loss Payee”, and “Mortgagee”?


Named Insured – This is the OWNER of the policy whose name is listed on the declaration‟s page. This is the
party that the insurance is intended to cover or protect and this party must have an insurable interest (ie: legal title)
in order to purchase the policy. Only the „named insured‟ has the legal authority to file and/or manage claims,
receive refunds, or make any changes or modifications to the policy itself.

Additional Insured – An „additional insured‟ is a party that may have some interest or liability in the property such
as a co-signer on the Promissory note. This endorsement and extent of coverage varies a little with each company,
but as a general rule, this party usually has no protection at all for physical losses to the property such as fire, theft,
vandalism, hail etc, but there is coverage under the liability portion of the policy in the event of a property-related
suit in which the additional insured becomes involved.

Additional Interest – This is another often confused and improperly used term that may vary by company, but
generally speaking, an „additional interest‟ (which is NOT the same thing as the Additional Insured just mentioned)
is a party with no insurable interest at all in the property (and therefore no coverage under the policy) but it is also a
party that needs to know whether or not a policy is in-force. An example of an additional interest might be the loan
servicing company. This party has no insurable interest in the property or coverage under the policy, but as the
responsible party servicing and maintaining the loan, it does have an „interest‟ in being notified in writing in the
event of the policy‟s cancellation.

Loss Payee – a Loss Payee is a party (included in the „loss payee clause‟ included in virtually all policies) to which
claim payment is to be made in relation to the insured property in the event of a loss. Mortgagees are automatically
considered to be „loss payees‟. For example, there is a roof claim for $15,000. The lender has a financial interest in
making certain that the repairs are performed on the property which is collateralizing the loan. The claim payment
will be made out to the lender (the “First Loss Payee”) as well as to the insured. In this way, the lender must
endorse the claim check and it can then verify repairs have been performed prior to releasing funds.

Mortgagee – A mortgagee is any party which has extended financing or made a loan to another party (the buyer or
mortgagor) for the purchase of real property and which actually holds a formal mortgage document
collateralizing the property and giving legal right to foreclose on said property in the event of the borrower‟s
default on the loan. The underlying bank or lender is obviously a mortgagee, but so is the SELLER of the property –
but ONLY if the seller has actually carried back a second mortgage in his or her name (or a Company or Trust
name).




                                           By Investors. For Investors.
                                           www.InsuranceForInvestors.com
                                                                                           Local: (512) 501-4010
                                                                                        Toll-Free: (800) 299-8994
                                                                                    www.InsuranceForInvestors.com

                                                                                          Last Revised March 2012



                               FAQ‟S About Insuring Wrap-Around Mortgages



 How Should the Seller Be Listed In The Insurance Policy?                                                           TOP


It depends. Is the seller actually carrying back a formal mortgage listing the buyer as the borrower and the seller as
another mortgagee? If so, then the seller should be listed as a “Mortgagee” on the policy.

If the buyer is purchasing the property as a „subject to‟ transaction (below) rather than a „wrap-around‟ mortgage,
then the buyer is simply „assuming‟ the seller‟s loan with the underlying lender (but usually without the lender‟s
knowledge or consent) and the seller IS NOT carrying back any type of second mortgage with the buyer. In this
case, the seller SHOULD NOT be listed as a mortgagee and rather as an additional insured or additional interest
depending upon the transaction details.


 What‟s the Difference Between a “Wrap-Around” Mortgage and a “Subject-To” Sale?                                    TOP


In a „Subject-To‟ transaction, the buyer is simply „assuming‟ the seller‟s underlying loan with his or her original
lender and the seller is transferring both legal and equitable title to this new buyer. The seller usually just wants to
get out from under the payments and loan burden with the mortgagee and he or she is NOT carrying back a
mortgage or any type other type of seller financing.

In a „Wrap-Around‟ mortgage, the buyer is purchasing the property from the seller and assuming the seller‟s
underlying mortgage loan indebtedness, but the property is being sold for an amount greater than what is owed on
the underlying loan and the seller is „carrying back‟ and actual second mortgage for the buyer. This means that the
seller is also a mortgagee.


 How Concerned Should the Buyer and Seller Be About The Price of New Insurance?                                     TOP


Price is obviously an issue with all policies, but it should never be THE issue. You get what you pay for. Not all
policies are the same (which is addressed in another question) and the price is usually indicative of the coverages
being provided – or not provided - as the case may be. If a one company‟s quote is a great deal less expensive
than another, it‟s for a reason. Adhering to the rules of “nothing is free” and “if it seems too good to be true it
probably is”, the reason policies may differ in price is because they are not the same policy versions and the
coverages differ. If you‟re paying more – it‟s probably because you are getting more in return. Conversely, if one
policy costs less than another – it‟s also probably because you are getting less in return as well. It‟s imperative that
you understand exactly what it is being purchased.



 Why is the buyer‟s insurance often more expensive than the seller‟s previous insurance?                            TOP


This is probably due to many factors, the first and most common is due to the buyer‟s „insurance score‟ (below). In
addition, rates vary among companies and there are some insurance companies which simply refuse to insure any
property with any type of seller-financing in place.




                                          By Investors. For Investors.
                                         www.InsuranceForInvestors.com
                                                                                           Local: (512) 501-4010
                                                                                        Toll-Free: (800) 299-8994
                                                                                    www.InsuranceForInvestors.com

                                                                                           Last Revised March 2012



                               FAQ‟S About Insuring Wrap-Around Mortgages



 What is an „Insurance Score‟ and is My Credit (FICO) Score Used as a Factor in Determining
                                                                                                                     TOP
 Insurance Premiums?


Just as your credit (FICO) score is a tool used by creditors to determine whether or not to extend credit based on
past financial and payment history, an insurance score is a tool used by the vast majority of insurance companies
to determine premiums. It is important to understand that an insurance score and your credit score are not the
same thing – though your credit score does have an impact on your insurance score. Confusing? In short, an
insurance score is a rating computed and used to represent the probability of a client filing claim during
the coverage term – not to determine creditworthiness. However, this score is largely based on an individual‟s
credit rating and it will definitely have an impact on the premiums he or she pays for coverage; a higher score
(meaning higher risk to the company) will result in higher premiums and a lower insurance score (meaning less risk
to the company) will result in lower premiums.

Individual insurance scores are based, in large part, on credit ratings because historical insurance data reveals a
direct correlation between poor credit ratings and a higher number of insurance claims. However, while all
companies are required to use the same basic criteria in determing insurance scores, they do have latitude to take
other client information into consideration as well depending upon the company‟s „risk appetite‟.

Insurance scoring models vary by company, but the one thing that they all have in common is that they are built
from various credit report factors, combined with insurance claim and profitability data, to produce a numerical
algorithm which, in turn, produces a rating. It is important to understand that insurance scores are not intended to
measure creditworthiness, but they do take credit information into consideration such as age of oldest accounts,
ratio of total balance to total credit limits, number of open revolving accounts, and number of revolving accounts
with balances greater than 75% of limits, etc. Therefore it is possible for someone with a high credit (FICO) score
and excellent payment history to actually receive a poor insurance score. Like it or not and regardless of
whether or not you agree with it, almost all insurers consider credit report information in their underwriting
and pricing decisions as a predictor of profitability and risk of future losses.


 Do I Need To Provide a Social Security To Get a Quote?                                                              TOP


You are not required to give your SSN – but providing it can help (or hurt) your premium. Social security numbers
are used by almost all insurance companies in order to search for past claim history as well as to help establish an
individual‟s insurance score (already discussed). If you choose not to provide your social security number, you
should be aware that most companies automatically consider the quote to be a higher risk „No Hit‟ – meaning that
the individual‟s insurance score cannot be calculated and therefore an accurate premium rate cannot be
determined. In this situation, the party applying for insurance is automatically „tiered‟ or increased to a higher rating
(meaning higher premium cost) in order to compensate for the company‟s risk of not being able to calculate this
score accurately. Some companies will not provide a quote at all without an SSN.

However, there are times when it may be advantageous not to use a social security number. For example, if the
party applying for insurance knows that he or she has a low credit score with past collections, charge-offs, and so
on, using the SSN to develop an insurance score based on this credit information may actually result in a premium
that is much higher than if the company simply quoted the policy as a “No Hit” and automatically rated or tiered the
premium up accordingly.




                                          By Investors. For Investors.
                                          www.InsuranceForInvestors.com
                                                                                            Local: (512) 501-4010
                                                                                         Toll-Free: (800) 299-8994
                                                                                     www.InsuranceForInvestors.com

                                                                                           Last Revised March 2012



                               FAQ‟S About Insuring Wrap-Around Mortgages



 Should the Seller Keep His or Her Original Homeowner‟s Insurance in Place?                                          TOP


NO. Contrary to common (and very incorrect) advice often given by many real estate, legal, and insurance
professionals who should know better, the seller should not keep his or her insurance in place. Although this
sounds okay in theory if you are not an insurance professional and you know nothing about insurance law - and it is
what many parties want to hear in order to make the deal easier to close - it‟s a very bad idea. You see, in a wrap-
around transaction, the seller is formally transferring both legal and equitable title to the property and although the
seller may still be „on the loan‟ with the underlying mortgagee due to the Promissory Note that he or she originally
signed when the property was first purchased, the fact is that the seller no longer has an „insurable interest‟ in
the property since it has been transferred to the new buyer. Depending on circumstances, this can also be
considered a fraudulent act since homeowner‟s policies are intended for „owner occupied‟ residences. Since the
seller no longer occupies the property (or even legally owns it since title has been transferred), he or she is
concealing relevant information from the insurance company. In the event of a loss or policy audit this could pose a
very big issue. In addition, any agent or broker who knowingly issues a new homeowner‟s policy for the buyer while
also being aware that the seller‟s policy is still in-force is also guilty of concealment, material misrepresentation, and
possibly other legal and contract violations and he or she may face several administrative and civil penalties,
including large fines and the loss of his or her insurance license.



 Why Do Real Estate Attorneys and Some Other Insurance Agents Provide Different Insurance-
                                                                                                                     TOP
 Related Advice Than What InsuranceForInvestors.com Provides?


This is a somewhat precarious question to answer, but it normally comes down to just four reasons: (1) lack of
investing knowledge, (2) inexperience (3) ignorance of the principals of insurance, real estate, and contract law,
and sometimes (4) apathy.

Unfortunately, as is true in all industries, having a license isn‟t necessarily the same thing as having knowledge or
experience. In addition, insurance professionals who have little or no personal experience in real estate investing
are often unaware of the „big picture‟ of how every part of a transaction fits together and how all of the various
parties are inter-related and what future problems and legal issues can (and probably will) arise in the future
because the insurance was issued incorrectly. Furthermore, most agents are salespeople representing large „well-
branded‟ companies and although they have an insurance license, they are generally in the business of either
telling potential clients what they want to hear in order to make a sale or they are simply unaware (whether due to
ignorance of the subject or lack of experience) of the technical and legal details related to issuing the insurance
contract appropriately. As salespeople, their main focus and concern is almost always just on the price alone with
the actual coverage being provided (or not provided) being only a secondary issue. Lastly, the vast majority of
agents issuing policies have never actually read one from beginning to end and they have no idea what the legal
considerations are with regards to specific exclusions, prohibited risks, and so on. Most real estate attorneys are
very well versed in real estate law, however, they may know little or nothing about insurance and/or insurance law
and in the course of discussing the specifics of wrap-around transactions there is a common risk of giving
insurance-related advice that may be illegal or counter to the actual principals of insurance.

Just as you probably wouldn‟t take real estate advice from a mechanic or legal advice from the clerk at the store,
you shouldn’t take insurance advice from anyone except an experienced and credible insurance professional.




                                           By Investors. For Investors.
                                          www.InsuranceForInvestors.com
                                                                                         Local: (512) 501-4010
                                                                                      Toll-Free: (800) 299-8994
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                                                                                        Last Revised March 2012



                              FAQ‟S About Insuring Wrap-Around Mortgages



 Is There Any Real Difference In Policies Offered By Different Companies?                                         TOP


Absolutely! Each and every insurance company in the country issues a policy that is different from every other
company. No two insurance policies are exactly like and purchasing insurance is not like buying a gallon of milk
whereby the only real difference may be in the price. It is much more complicated than that. Insurance companies
may have the basic policy „form‟ in common, but in regards to the addition (or exclusion) of specific coverages such
as foundation coverage, water damage, continual seepage and leakage, replacement cost versus actual cash
value, and so on, there is a wide variation from one company to the next and even in the same company issuing
multiple types or versions of their policies depending upon the wants and needs of the named insured. The chart
below is a general (but certainly not all-inclusive) representation of the various types of insurance policies
available. Because of differences in „risk appetite‟, one company may offer additional endorsements (i.e.: policy
„add-ons‟) that another company doesn‟t and vice versa.



                                               Basic                  Better                     Best

                                        Not Recommended          ‘Okay’ Coverage           BEST Coverage

                                                     1                       2
                                              HO-A                    HO-B                      HO-3
      Type of Coverage
      Dwelling                           Named Perils Only     Broad Named Perils               OPEN
      Contents / Personal Property       Named Perils Only     Named Perils Only                OPEN
      Covered Perils
      Fire                                     YES                     YES                       YES
      Lightening                               YES                     YES                       YES
      Windstorm / Hurricane / Hail             YES                     YES                       YES
      Smoke                                    YES                     YES                       YES
      Damage by Vehicles                       YES                     YES                       YES
      Damage by Aircraft                       YES                     YES                       YES
      Riot or Civil Commotion                  YES                     YES                       YES
      Explosion                                YES                     YES                       YES
      Collapse of Building                 NOT COVERED                 YES                       YES
      Freezing                             NOT COVERED                 YES                       YES
      Weight of Ice / Snow                 NOT COVERED                 YES
      Falling Objects                      NOT COVERED                 YES                       YES
      Accidental Discharge of Water        NOT COVERED          YES ($5,000 Limit)               YES
      Backup of Sewers & Drains            NOT COVERED          YES ($5,000 Limit)               YES
      Continual Seepage / Leakage          NOT COVERED          Rare (by Company)          Possibly Available
      Foundation Coverage                  NOT COVERED          Not Usually Available     Available as Endor.




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                                                                                              Local: (512) 501-4010
                                                                                           Toll-Free: (800) 299-8994
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                                                                                             Last Revised March 2012



                                FAQ‟S About Insuring Wrap-Around Mortgages



                                                  Basic                   Better                      Best

                                           Not Recommended           ‘Okay’ Coverage             BEST Coverage

                                                        1                        2
                                                 HO-A                     HO-B                       HO-3
       Claim Settlement

       Dwelling                              Actual Cash Value       Replacement Cost          Replacement Cost

                                                                     Actual Cash Value
       Contents / Personal Property          Actual Cash Value     Replacement cost can be     Replacement Cost
                                                                    added by endorsement



1
    If an applicant has a poor credit history or if he or she has a foreclosure or bankruptcy within the past five years,
    many companies may refuse to issue coverage altogether or restrict policy choices to only an HO-A policy form.
2
    This is the only policy type that most ‘well-known’ and ‘well-advertised’ companies offer.


    Can The Buyer‟s New Insurance Premium Be Paid From The Seller‟s Existing Escrow Account
                                                                                                                       TOP
    with the Underlying Mortgagee?

Yes and No. Sometimes lenders will pay one party‟s insurance from the other party‟s escrow account, but other
times they won‟t. There is absolutely no rhyme or reason to when this happens and when it doesn‟t, it is simply
„luck of the draw‟ and it depends upon how closely the lender looks at the insurance documentation and how
closely they are inspecting their existing loans. If they do not pay, it is then the insured party’s responsibility.

Unfortunately, most wrap-around transactions are set up so that the new buyer’s insurance if to be automatically
paid from the seller’s existing escrow account. This is the very first problem and it means that the transaction has
probably not been set up correctly. In a wrap-mortgage, the parties wish to transfer legal title to the property but
not necessarily advertise that fact to the original underlying lender (mortgagee) due to the acceleration (Due on
Sale) clause – but that is exactly what this does.

The escrow account is basically a bank account set up by the lender in the name of the original borrower (now the
seller) in order to hold funds for payment of taxes and insurance once a year. This way the lender keeps control
and makes certain that the property collateralizing their loan is always insured and that the taxes are always paid.
However, when a wrap-mortgage is inappropriately set up to pay “Party A‟s” insurance from “Party B‟s” bank
account – problems arise. As an example, assume the lender is “ABC Lending Bank” and their records show that
their mortgage loan for 123 Anywhere Street is with Mr. John Smith. John also has an escrow account established
with the lender as part of the loan. However, five years later John sells his home via wrap-around mortgage to
Mary Jones and the transaction is set up in such a way that Mary‟s new insurance is to be paid from John‟s escrow
account with “ABC Lending Bank”. When the insurance bill is sent for payment to the lender, it‟s in Mary‟s name
but yet the parties want it to be paid from John‟s account.




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                                                                                           Local: (512) 501-4010
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                               FAQ‟S About Insuring Wrap-Around Mortgages


If the bank is being kept unaware of the sale or transfer – why would they pay for one person‟s insurance
with someone else‟s money? This is where 99% of problems insuring wrap-around mortgages occur. Also, just
because the two parties in the transaction agree to terms (such as John „assigning‟ his escrow account and monies
to Mary) – the bank / lender (who actually has the account and money) didn‟t agree to ANYTHING. Therefore, they
are not obligated in any way to release money to Mary or for any of Mary‟s property-related expenses. If the lender
refuses to release funds for the payment of insurance, it‟s the policy owner who needs to pay the premium instead.

Ideally, the new buyer should either have a second escrow account set up with the new loan servicing company
and pay the first year‟s premium at closing with subsequent renewals sent to the loan servicer for payment from the
second year forward OR payment should be set up to regularly auto-draft from the buyer‟s bank account.

While we want to assist all transactions in closing smoothly, it is not the responsibility of
InsuranceForInvestors.com to „chase down‟ payments from mortgagees or named insured policy owners
and we are not responsible for the manner in which the insurance billing is set up during the course of the
property sale or transfer. This is the responsibility of the seller, buyer, real estate attorney, and transaction
coordinator putting the wrap-around together. Our responsibility is to properly issue the insurance coverage.


 Why is Insurance So hard To Obtain When Working with “Wrap-Around” Mortgages?                                       TOP


Quite frankly, insurance is designed for and is intended as a straight „one-to-one‟ transaction whereby the
insurance company offers to insure a property or risk for the owner while keeping the mortgagee (who has a
financial interest) informed as to the status of the policy during its term. It works very well for the reason and intent
for which it exists.

However, in a wrap-around mortgage scenario, many nuances take place in order to not let the lender know of the
sale and insurance policies are simply not designed or intended to accommodate these issues; primarily:

       All parties want/need insurance for the subject property but they do not want the insurance company to
        issue the policy as it is supposed to legally be issued due to the fact that they do not want to notify the
        underlying lender of the property transfer;

       The new insured policy owner (buyer) often expects the policy to be paid from someone else‟s escrow
        account (the seller) and the party holding these funds refuses to make payment;

       Both the buyer and seller need to have the mortgagee listed in the policy (which means he mortgagee is
        automatically sent evidence of insurance by the insurance company), but yet neither party wants the
        mortgagee to actually know that the policy is in a new name and that the property has been transferred.

In other words, all parties often want the insurance issued correctly so long as it’s not really issued correctly…..

Because of these two main issues, insurance agents and brokers are often asked to (and often do) commit fraud
and material misrepresentations to the insurance company (which may have huge potential legal issues in the
future) and relevant information is often concealed from both the insurance company as well as the mortgagee.




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                              FAQ‟S About Insuring Wrap-Around Mortgages



 Why is There Such a Difference in Prices Among Different Quotes?                                                    TOP


Many reasons. In no particular order:

       The applicant‟s insurance score is weighted differently from one company to the next (each company
        assigns different weight to this score depending upon the company‟s own risk pricing model)

       The policy form and endorsements offered by the company (basic policies such as HO-A policies which
        little coverage cost far less than better HOB and HO3 policies). This is very important.

       The replacement cost of the property is much higher or lower on different quotes.


 What Happens When The New Buyer Has To File a Claim?                                                                TOP


It depends on how the policy was issued.

    1. If it was issued as a basic HO-A policy (which is only “cash value” claims coverage) and the buyer was not
       involved in the purchasing decision (meaning it was primarily managed by the transaction coordinator) and
       the decision was made solely on price – there could be problems. For example, if the policy was issued as
       an HO-A and there was a roof claim for $10,000, by the time the insurance company calculates the
       depreciation on the roof, the policy owner (claimant) may only receive $4,000 or so for the claim – which
       also means that the homeowner will have to come out of pocket at last $6,000 (including his or her
       deductible). If this money is not available, it means that the roof cannot be repaired and legal issues may
       arise if the policy owner claims that the other parties in the transaction were negligent or did not work in his
       or her best interest.

    2. If the policy was issued correctly and as an HO-B or HO3 policy, then most claims should be at
       replacement cost coverage. However, depending upon the size of the claim, any checks or claim payments
       may be made out to the named insured policy owner as well as to the mortgagee (which is also a loss
       payee). In the event that the claim check is made out to the policy owner and mortgagee, the policy owner
       will have to have each mortgagee listed on the policy endorse the check so that it may be deposited and
       repairs paid for.

        NOTE: It is imperative that all parties understand that because of the 438BFU Lender’s Loss Payable
        Endorsement automatically included in virtually all home and dwelling policies since 1948, the mortgagee is
        automatically considered a ‘loss payee’ and, theoretically, any and all claim checks from the insurance company
        should be made payable to BOTH the named insured on the policy as well as the mortgagee(s). This means
        that if John sells his home to Mary and Mary has a fire claim two years later, the $50,000 claim check will
        probably be made out to Mary (the policy owner) AND to whomever the underlying mortgagee(s) is/are, including
        the bank and John. Both must endorse the check in order for it to be cashed and this can inform the lender of the
        property’s previous transfer of title. The reason we say ‘theoretically’ is due to the fact that many insurance
        carriers do not make claim checks payable to the mortgagee unless the claim amount exceeds a certain
        threshold, usually $5,000 or $10,000. This is a ‘hit and miss’ scenario dependent upon the company managing
        the claim and issuing the policy and there is no way to know how a claim check will be issued until it is actual
        issued. The agent or agency issuing the policy has absolutely no control over this.



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                              FAQ‟S About Insuring Wrap-Around Mortgages



 How Should Insurance Be Managed When Setting Up Servicing for a “Wrap” Mortgage?                                    TOP


Ideally, insurance should be set up in the following manner:

       The new loan should be set up to be serviced by an independent loan servicing company and a secondary
        escrow account set up for the new buyer in order to maintain funds for paying annual insurance renewal
        bills.

       The first year‟s premiums should be paid in full at closing by the new buyer(s).

Optionally:

       Policy should be issued in the name of the new buyer and payments should be set up to be paid by either
        in-full annually or by recurring credit card or electronic funds transfer (EFT) from a checking account.


 What are the Different Payment Options for Insurance Premiums?                                                      TOP


Billing Plans vary by company, but generally speaking, insurance can be paid for in monthly installments, quarterly
installments, or in full at one time. However, this should be decided PRIOR TO CLOSING. It is best to have the
loan servicing company establish a second escrow account for the new buyer, have the first year of premiums paid
at closing, and then all subsequent renewal premiums paid from this second escrow account.



 Will the Underlying Lender Be Notified of the New Insurance and Will This Inform Them That
                                                                                                                     TOP
 The Property Has Been Transferred?

Yes – the underlying mortgagee will be notified of the new insurance. Any time a policy is issued and a mortgagee
is listed in the policy, that mortgagee automatically gets a new evidence of insurance mailed to them by the
insurance company (not the agent or agency) issuing the policy. The mortgagee and any additional insureds or
additional interests are also notified if/when the policy cancels for any reason.



 Will the Underlying Lender or Mortgagee Call the Loan Due if They Find Out That The Property
                                                                                                                     TOP
 Has Been Transferred?

This is entirely up to the underlying mortgagee. Unfortunately, this is an inherent risk in all wrap-around mortgage
transactions. While no absolute answer can be given, it has been our experience at InsuranceForInvestors.com
that mortgagees will rarely call any loan due so long as it is performing and payments are being made. Again, this
is the decision of the original lender, but it is very unlikely.




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                                                                                      Toll-Free: (800) 299-8994
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                              FAQ‟S About Insuring Wrap-Around Mortgages



 Can The Seller Just Transfer His or her Policy To The New Buyer?                                                  TOP


No. Unlike real estate contracts; insurance contracts (policies) are NOT transferrable and they cannot be assigned
from one party to another.


 What Happens if the Buyer‟s New Insurance Cancels for Non-Payment of Premium?                                     TOP


Prior to cancellation for non-payment of premium, the named insured policy owner will receive several notices in
order to make payment and keep the policy in force. If the policy does cancel, the named insured can contact us to
make payment and we will have the policy reinstated ONE TIME if the carrier will allow it. If the policy cancels
again for the same reason, we will consider this to be a non-performing account and we will not have the policy
reinstated.


 Can the Seller of the Property Make Changes to the Buyer‟s Insurance Policy?                                      TOP


No. Only the Named Insured (Policy Owner) has the legal authority to make any modifications to the insurance
policy, make claims, cancel the policy, or receive refunds.



 If the Buyer‟s Insurance Isn‟t Paid For Using the Seller‟s Existing Escrow Account With The
                                                                                                                   TOP
 Underlying Mortgagee, What Happens To The Money That‟s In That Escrow Account?

The money accumulating in the seller‟s original escrow account will continue to do just that – accumulate. Although
the seller may have agreed to transfer all monies in this account to the new buyer – that was an agreement
between those two parties, not the underlying mortgagee, and this escrow account is still in the seller‟s name. In
most cases, the new buyer (or perhaps the seller) can send proof of the insurance policy being paid in full with
money outside of this account to the mortgagee and request that funds be released from escrow as a
reimbursement.

Unfortunately, any checks sent from this account for reimbursement will only be made out to the person whose
name is actually on the account (the seller). This means that the seller will in turn have to cash this check and then
send these funds back to the new buyer. This may have to be done each year. This is another inherent difficulty
specific to subject-to and wrap-around mortgages.


 What are „Surplus Lines‟ Companies and Why is the Policy Being Financed?                                          TOP


The Surplus Lines insurance market (sometimes referred to as the non-standard market) exists to provide
insurance to clients with risks that are not allowable in the „standard‟ market. These companies, most of which are
“A-Rated” or better, are required to charge state tax and the carriers also charge policy fees. Some of the reasons a
policy may need to be written in this non-standard market include:


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                              FAQ‟S About Insuring Wrap-Around Mortgages



       The named insured has experienced a foreclosure or bankruptcy within the past 5 years

       There are an excessive number of claims on the property

       The property itself exceeds the carriers underwriting guidelines in terms of construction characteristics,
        age, or maintenance conditions


 Why is Information About the Property‟s Construction and Physical Characteristics Needed
                                                                                                                   TOP
 For a Quote and How is The Replacement Cost Determined?

In order to develop the amount of insurance needed to adequately protect the property against loss, known as the
reconstruction or replacement cost, we must first need to know the physical characteristics of the property such as
the square footage, year constructed, number of bathrooms, construction grade, and so on.

As addressed in another question, the reconstruction or replacement cost value is not a number simply chosen at
random. Most companies use the Marshall & Swift/Boeckh (MSB for short) data service to arrive at this value. MSB
is a large global company which tracks the labor and material costs for every zip code in every county in the United
States. Insurance companies pay millions of dollars each year to utilize the MSB service and when performing
quotes, agents are required to input the various construction data about the subject property such as square
footage, number of baths, exterior construction, construction grade, and so on. This information is then used to
calculate cost per square foot and total reconstruction value for the insured property.


 Why Can‟t InsuranceForInvestors.com Prepare Quotes With Just Minimal Information?                                 TOP


We regularly get asked the question “How much does insurance cost?” before even having a chance to put
together a quote. A good answer might be “How much does a red dress cost?” With regards to the dress, the
answer is “It Depends”. What kind of dress? What size? What material? Which designer? What store? As you can
see, there are many unknown variables that must be taken into consideration when answering that question.

The same holds true with insurance. We have many companies that we work with and in order to put together
accurate quotes, we need certain information required by the various insurance carriers – both about the property
itself as well as regarding the mortgagee and certain personal information for the named insured(s). With this in
mind, we also have specific property information forms that we use to capture all of this information at one time. If
this information is not provided and/or if the parties simply refuse to supply the information requested, we are not in
a position to spend hours making numerous phone calls and repeatedly asking for this necessary data.

The danger with providing quotes with only minimal information is that they aren‟t accurate and they will most likely
change (increase) in premium once the order to bind the policy has been given and reports are pulled by the carrier
and accurate data finally obtained.




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                               FAQ‟S About Insuring Wrap-Around Mortgages



 What is the Difference Between Replacement Cost and Actual Cash Value?                                             TOP


Replacement cost (RCT) is the full estimated value that it is expected to cost to rebuild or replace the insured
property with similar „like kind‟ construction at current material and labor rates (explained more in the question
below). For example, if the property were to be destroyed by fire or tornado and it were insured with a $100,000
replacement cost, the policy owner would have up to $100,000 to rebuild or replace the property with no
consideration for the property‟s age, maintenance condition at the time of loss, or any other such issues.

Actual Cash Value (ACV) is defined as “Replacement Cost minus Depreciation”. It is extremely risky to have any
policy with ACV coverage on the dwelling or contents. Using the example above, if the policy had up to $100,000
of coverage (but it was issued with actual cash value rather than replacement cost) and the home were to be totally
destroyed because of a covered loss, the policy owner WOULD NOT have $100,000 to rebuild or replace the
property. Instead, the insurance company would take the $100,000 listed in the policy and then calculate the
property‟s depreciated value at the time of the loss taking into consideration such things as the age of the roof, the
age of the structure itself, the structure‟s maintenance condition, and other factors. Once this depreciation was
calculated (assume it is $35,000), the insurance company would then take the $100,000 replacement cost listed in
the policy, subtract the $35,000 of depreciation, and the policy owner would then receive only $65,000 with which to
rebuild the home. This may not be enough to cover the loan balance or replace the structure.

With ACV coverage, the same example happens even in partial claims such as roof replacement after a
hailstorm. If the full roof replacement is $15,000, the company will subtract the depreciation of the roof based on
its age and estimated „years of useful life‟ and only pay the difference to the policy owner – which means that the
owner will normally have to pay 50% or more of the entire cost of the roof not including his or her deducible.

Actual Cash Value coverage is not recommended and it is important to know that most companies with „cheap‟
homeowner premiums are actually quoting and/or issuing basic HO-A policies which are Actual Cash Value policies
for both dwelling and contents.



 Why Is The Property‟s Replacement or Reconstruction Cost Different than the Appraised Value
                                                                                                                    TOP
 or Sales Price?



The sales price of a property is nothing more than an amount that one party is willing to sell it for and another party
is willing to purchase it for. It has nothing to do with insurance. Similarly, the appraised value is simply a
professional opinion of what the property‟s market value is at a specific point in time given the neighborhood,
property condition, and market conditions. Again, this has nothing to do with insurance whatsoever.

In the insurance world, what insurance companies are concerned with is a property‟s replacement value – often
referred to as the reconstruction cost. This is a number that is completely independent and totally unrelated to the
market value, sales price, appraised value, loan amount, tax appraised value, or anything else. It is the amount that
the inuring company estimates that it will take to, in the event of a total loss, replace the property with a similar or
„like kind‟ property at current labor and material rates. This value includes soft costs such as blueprinting and
permitting fees and other costs associated with reconstruction but often forgotten.




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                              FAQ‟S About Insuring Wrap-Around Mortgages



The reconstruction or replacement cost value is not a number simply chosen at random. Most companies use the
Marshall & Swift/Boeckh (MSB for short) data service to arrive at this value. MSB is a large global company which
tracks the labor and material costs for every zip code in every county in the United States. Insurance companies
pay millions of dollars each year to utilize the MSB service and when performing quotes, agents are required to
input the various construction data about the subject property such as square footage, number of baths, exterior
construction, construction grade, and so on. This information is then used to calculate cost per square foot and total
reconstruction value for the insured property.


 What are Some of the Most Common Mistakes and/or Pieces of Bad Advice That
                                                                                                                   TOP
 InsuranceForInvestors.com Most Often Sees Regarding Insurance for Wrap Mortgages?



    1. Keeping the Seller‟s Existing Homeowner‟s Policy in Place and Having the New Buyer Purchase His
       or Her Own Policy in Addition to the Seller‟s:

        a. It is the NEW BUYER who now has legal and equitable title to the property – not the seller. The seller
           has given those two things up even though he or she may still have a loan or promissory note with the
           original mortgagee. This means the seller no longer has an insurable interest in the property and is not,
           therefore, eligible to insure it.

        b. By the seller knowingly keeping his or her policy in place after the property sale or transfer, he or she is
           committing an act of concealment with regards to the insurance company (the original insuring
           company as well as the buyer‟s new company) and the buyer is committing an act of material
           misrepresentation by not informing his or her new insurer of this fact.

        c.   The agent issuing the new policy is committing both items above as well as a number of ethics
             violations if he or she is aware of the insurance situation and issues new coverage anyway in order to
             make a sell or appease the parties.

        d. In the event of a claim, there is a very real possibility that the new owner‟s insurance company will „flat-
           cancel‟ the policy back to the date of its original inception and deny the claim altogether if they become
           aware of the manner in which the policy was issued as described above.

    2. Having The Seller Keep His or Her Homeowner‟s Policy in Place and Then Having the New Buyer
       Purchase a “Renter‟s” (HO4) Policy:

        (We at InsuranceForInvestors.com have been shocked at the number of times we have heard this bad
        advice from other insurance professionals as well as those actively involved in seller financing)

        a. Having the seller keep his or her existing policy in place involves all of the issues described in the
           situation described above. In addition;

        b. The property itself is now completely uninsured. Because the seller no longer has an insurable
           interest and isn‟t an owner-occupant, it doesn‟t matter whether his or her policy is still in-force; the
           policy won‟t cover claims on a property that the insured party doesn‟t actually have an insurable
           interest in and in which acts of concealment and/or material misrepresentation have been committed.


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                         FAQ‟S About Insuring Wrap-Around Mortgages



   c.   Secondly, a „renter‟s‟ policy – which the new buyer is often advised to purchase in lieu of a
        homeowner‟s policy – is the absolute wrong type of policy. The buyer is the OWNER OCCUPANT
        of the property with legal and equitable title; he or she is not a tenant as if it were an apartment. A
        „renter‟s‟ policy may provide some coverage for the named insured‟s personal contents and belongings,
        but not nearly as much as a comparable homeowner‟s policy. In addition, a renter‟s policy provides no
        coverage whatsoever for the physical structure itself – so there is not insurance coverage for water
        damage, roof damage, fire, collapse, or any other similar perils. Furthermore, most renters‟ policies are
        issued with only the minimum $25,000 of personal liability coverage (assuming that it is even included
        at all) and these policies contain no coverage for premises liability.

   d. In summary, in the event of a claim or unexpected loss, there will be coverage for the dwelling or any
      other physical structure and the new owner will actually be left with little or no liability protection
      whatsoever. Both policies may be flat-canceled by the insuring company for violation of underwriting
      and eligibility guidelines as well as for concealment and material misrepresentation.

   e. Once these issues occur, litigation often begins between all parties involved in the transaction.

3. Purchasing a “cheap” insurance policy just to „get the deal done‟ and so as not to have an impact
   on the buyer‟s monthly payments.

   a. This is very common. Sure, everyone wants to pay as little as possible – but it‟s true that you also get
      what you pay for; and this is especially true with regards to the variations in insurance policies.
      Because consumers and buyers in a wrap-mortgage transaction are not usually knowledgeable or
      sophisticated regarding insurance, they only look at the monthly or annual cost of the policy and not the
      coverage that they are actually purchasing to protect the property against an unexpected loss.

   b. More often than not, buyers are talked into purchasing „cheap‟ and basic HO-A policies simply because
      of the price, which means that is most cases they are woefully underinsured and they have no idea that
      their home (including the roof, other structures, and all contents) are only insured at „actual cash value‟
      and not replacement cost. This means that when there is a claim, they themselves may have to pay
      20% to 70% or more of the claim amount with their own money (not even including the deductible) due
      to the depreciation that will be calculated in by the insurance company. Cheap premiums now often
      mean much more expensive claims later on. This can lead to default on the loan and consumer-
      related litigation among all parties involved.



This Document is Intended for Reference and Informational Purposes Only and All Parties Should
     Consult Their Attorney for Any Legal Advice. This Has Been Provided as a Courtesy By:




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