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					Wildfire Roadmap to Recovery:
Meeting #6, January 24, 2008
Rancho Bernardo Community Presbyterian Church
- Private Construction Loan Process
- Working with Lender to Release
  Insurance Proceeds

     Karen Reimus
Availability of R2R Powerpoint
        Fire Recovery Ministry
        Road-to-Recovery Educational Series

      Beginning Feb 1, 2008
Fine print:
   The information provided in this program is intended for
    general educational purposes only. It should not be
    construed as legal advice.

   The speakers at today’s program are volunteering
    their time as educators.

   Neither United Policyholders nor the Rancho Bernardo
    Community Presbyterian Church endorse or warrant the
    message or services of any volunteer speakers.
Financing issues relating to rebuilding

 PrivateConstruction Loans
 SBA Loans
 Working with your lender to
  release insurance proceeds
An Overview of the Private
Construction Loan Process
   Loan acceptance
   Builder review
   Project acceptance
   Loan approval and loan closing
   Initial draw disbursed, construction begins
   Construction completed, final draw approved
   At last…welcome (back) home
SBA Loans
   With credit access tightening in response to the subprime mortgage
    crisis, the SBA's disaster loan program, offering 30-year, fixed
    interest rates well below market levels, could prove critical to
    recovery for many wildfire victims.

   To receive a disaster loan, applicants must have an acceptable
    credit history and a dependable stream of income large enough to
    cover monthly payments, which begin five months after the financing
    is delivered. The loan money is delivered in increments based on
    the progress of construction.

   The loans may be ideal for fire survivors who don't have savings to
    tap for repairs or would take a big tax hit for liquidating stock
If you qualify for an SBA loan:
   Homeowners who qualify for the lending
    program can borrow up to:
        $200,000 at a fixed rate of 2.94 percent
        to repair or replace their homes
        $40,000 to replace personal property,
        such as appliances and furniture.
When working with your lender to release
insurance proceeds…Know going in:
   Your mortgage documents are set up to protect
    the mortgage company from you taking your
    insurance rebuild money and disappearing
   Your lender, like your insurer, must act in good
    faith when dealing with you
   Your lender may pay 2% interest on insurance
    proceeds they are holding but only if you push
    them to do so
Periodic payments as phases
are satisfactorily completed:
   All funds for construction should be
    held in a fund control account and be
    dispersed by a third party throughout
    construction to the general contractor.
Hire carefully:
   Make sure your Architect and General
    Contractor are fully licensed in the
    State of California.

   Check license status with the CA.
    Contractor’s State Licensing Board at: or call 1-800-321-CSLB
Our heartfelt thanks to:
 The Rancho Bernardo Community
  Presbyterian Church
 All our UP Mentors and Sponsors
 The speakers at tonight’s meeting
 Overview of Private
 Loan Process

  Shelley Lundborg
Construction Loan Specialist
Served Cedar Fire Survivors
You have unique needs
    Every loan represents a unique borrower
     with a unique situation
    - Your situation is very unique and stressful
   Look for loan officer and mortgage company
    expert in construction loans
       Pitfalls to avoid

   Look for best service, lowest fees, interest, discounts
       How can you tell?

   Look for Lender and Agent sensitive to your rebuilding
    under duress following the fires
What is a Construction-to-
Permanent Loan?
   A Construction-to-Permanent Loan is two loans in one.
   Unlike buying an existing home, financing the building of
    a new home includes a construction phase, the period of
    time your new home is being built.
   Once construction is complete, a permanent mortgage is
   A Construction-to-Permanent Loan includes both the
    construction phase and the permanent mortgage.
    This is why it’s called a Construction-to-Permanent Loan.
How does the construction loan
process work?
   The Construction-to-Permanent Loan process is similar
    to the process of a standard home purchase or refinance
   Unlike a purchase transaction for an existing home, a
    Construction-to-Permanent Loan involves determining
    the value of a home that is not yet constructed.
   In determining the future value of your new home, we
    request information on the planned improvements and
    construction costs.
Overview of the Process
   Pre-qualification/Application
   Underwriting
   COE – Approval
   Construction Period
   Permanent Period
Glossary of Terms
   - Handout at Entrance
   Fixed Price Contract
   Cost Plus Contract
   Supervisory Contract
   Cost Breakdown
   Description of Materials
   Allowance Items
   Draw
   By Owner Items
   Contingency Reserve
   Interest Reserve
What is “one-time close” and how does it
save time and money?
   One-time close means with one construction
    loan application, qualification and closing, you
    get all the financing you need to build your home
    and obtain a permanent mortgage when
    construction is complete.
   Best of all, you only pay one set of closing costs.
   There are no payments during the construction
    phase so you can focus on your new home
    construction project.
What is meant by “no-payment”
Construction-to-Permanent Loan?

   As part of your Construction-to-Permanent
    Loan budget, we establish an account to
    pay the estimated interest costs during the
    construction of your home.
   This way you make no monthly payments
    during construction unless your interest
    reserve account is depleted before
    completion of your project.
What will home building cost?
Start by guesstimating these costs:
+ Buildable Site (You already have it)
+ Home Design
+ Construction Cost
+ Cost of Financing
Once I get started, how do I
access my funds?
   Unlike a standard purchase mortgage, a
    Construction Loan is disbursed in the form
    of payments (or "draws") as each phase of
    construction is completed.
What forms will be provided by
the lender?
   Typically, a lender will provide you with a
    variety of forms (although this may differ
    from lender to lender):
 ``application checklist'' form
 ``residential loan application'' form
 ``description of materials'' form
 ``construction cost breakdown'' form
What information will be required
from you?
   Employer's address and phone number, length
    of time you've worked there,and your current
    position and monthly income; OR
   (if self-employed) profit and loss statements, tax
    returns and balance sheets for the past two
    years, as well as the current period.
   Your personal asset and liability backup
    information, including account numbers,
    balances, and addresses and phone numbers of
    your financial institutions.
What information will be required
from you? (con’t)
   Details of lot acquisition such as deed or a copy
    of the earnest money agreement. Also, you
    must provide notification of any covenants which
    apply such as approval by an architectural
    review committee.
   Full documentation for your home building
       A complete set of working drawings
       A description of materials
       A construction cost breakdown
Work with your Contractor to
Provide Needed Documents
   Scrutinize the line items and make sure that
    you agree
   Review line items carefully
      materials
      cost

   Build in some breadth in line categories to
    allow for options on construction items
    - Example: “Exterior Siding” allows for stucco, brick, rock, HardieBoard
                A line item of “stucco” limits payment to stucco.
Discounts that may be offered by
various lenders
   Following 2003 Cedar Fire
      Loan with no points, closing costs, etc
      Discount on Title Insurance

   Following 2007 Firestorm
       40 – 50% discount on Title Insurance
   Every situation is unique
   Work with an experienced lender/loan
    officer to determine the best option for you
   There are many options available
   Gather all your information before making
    a commitment to anyone in the process
Questions and Answers

       Contact Information:
        Shelley Lundborg
     A Second Perspective on
     the Private Construction
     Loan Process

            Brian Wada
Construction Lending Officer/Loan Officer
        Working With Your
        Lender To Release
        Insurance Proceeds
               Ken S Klein
           2003 Cedar Fire Survivor
United Policyholders Disaster Recovery Mentor
Checks Made out from Insurance
Company to Lender and You
   If you have a mortgage, then some or all of the
    checks from your insurance company will be
    made payable jointly to BOTH you and your
    mortgage company. The mortgage company
    will end up with the money in its account.

   This will mean that at least at first, your
    mortgage company, not you, will control the
   The goal of this presentation is to explain
    to you how this happens, and to give you
    strategies to try to get control of the most
    money as soon as possible.
Your rights
   Here is the really big overview point:

   You have some, limited rights, but to get
    the most money as quickly as possible will
    take knowledge and persistence.
Why does this happen?

   Your mortgage documents protect the mortgage
    company preventing you from taking your
    insurance rebuild money and disappearing.
   In other words, the property and the house are
    the collateral for the loan; and so if you cashed
    the checks and did not rebuild, then the
    mortgage company would have a problem.

   These documents set up a system to prevent
    you from doing that.
   The standard California mortgage (and so,
    probably, your mortgage), says:

   5. Property Insurance. Borrower shall
    keep the improvements now existing or
    hereafter erected on the Property insured
    against loss
   When you borrowed money, you agreed
    that one way the mortgage company
    would be protected would be that the
    mortgage company would be co-insured,
    right along with you, for any harm to your
What does this mean?

   It means is that unless and until you get
    your mortgage company to agree to
    something different (in writing), every
    Coverage A check you get, and maybe
    some of your other coverage checks, will
    say something like: “Pay to the order of
    Jane Doe and Jane Doe’s Mortgage
   You then will be required to endorse the
    check first, and the mortgage company will
    deposit the money into its own account,
    and only will release the money to you
Big Question 1 (of 5):        If the checks are more
than the mortgage, does the Lender get to keep more
money than I owe them on the mortgage?
    It should not. Also in paragraph 5 from the standard
     California mortgage, you only agree,

    “… to generally assign rights to insurance proceeds to
     the holder of the Note up to the amount of the
     outstanding loan balance.”

    Indeed, for this reason, some mortgage companies also
     have a written policy saying the company only holds
     money up to the amount of the outstanding loan balance.
   Why does the company need such a policy if it already is
    part of the mortgage?
   The mortgage company has a special department (the
    “Loss Department”) that handles control of rebuild
    money after you have had a house fire. This work often
    is actually outsourced to an independent company. In
    either circumstance, the people you deal with may not
    know or try to know what the mortgage actually says.
   LESSON: Knowledge is power. Read and understand
    your documents, and use that knowledge to your
Be diligent, persistent, proactive
 The Loss Department is not user-friendly.
 Do not be surprised if:
     the “Loss Department” will not, on its own, refund to
        you the extra money until you ask for it
       or if it is difficult to talk to a live human being at the
        Loss Department at all
       or if you get form responses to letters rather than
        answer your questions.
Big Question 2: Will the mortgage co. be a
co-insured on only the Coverage A checks?

   Perhaps. Paragraph 5 also says:
   5. Property Insurance. …. If Borrower obtains
    any form of insurance coverage, not otherwise
    required by Lender, for damage to, or
    destruction of, the Property, such policy shall
    include a standard mortgage clause and shall
    name Lender as mortgagee and/or as an
    additional loss payee ….
   A good rule of thumb is to assume that the
    mortgage company could claim a right to
    be treated as a co-insured on insurance
    coverage for those things that are or must
    stay on the property when the house is
    sold -- plants, grass, the house, the fence,
    the driveway, etc.
   But insurance companies often only co-write
    the Coverage A checks, and Loss
    Departments often do not challenge that.
Big Question 3: Do I get interest on the
money while the mortgage company holds it?
   Probably, but usually not without a fight (at least
    a little one). That same paragraph 5 in the
    standard California mortgage also says:
   “Unless an agreement is made in writing or
    Applicable Law requires interest to be paid on
    such insurance proceeds, Lender shall not be
    required to pay Borrower any interest or
    earnings on such proceeds.”
California arguably does have an “applicable law.”
The California Civil Code says:
     “§2954.8. Payment of Interest to Borrower.
     (a) Every financial institution that makes loans upon the security of
      real property containing only a one-to four-family residence and
      located in this state or purchases obligations secured by such
      property and that receives money in advance for payment of taxes
      and assessments on the property, for insurance, or for other
      purposes relating to the property, shall pay interest on the amount
      so held to the borrower.
     The interest on such amounts shall be at the rate of at least 2
      percent simple interest per annum.
     Such interest shall be credited to the borrower's account annually or
      upon termination of such account, whichever is earlier.”
   Many folks successfully argue to their mortgage
    company that insurance proceeds checks to
    fund a rebuild are “money in advance for
    payment … for … purposes relating to the
    property.” Simply put, they get 2% interest.

   CAUTION: To my knowledge, no one has ever
    fought about it all the way through to court, and
    so there is no “final” answer.
   There is another, different argument you
    could try -- the leading book on California
    real estate law – Miller and Starr – argues
    that there is a California court decision
    suggesting that if a mortgage company
    holds the money in an interest bearing
    account, then the interest is your money
    (if you want to look this up, it is section 10:61 of the treatise titled
    California Real Estate by Miller & Starr).
So here is another approach you
could take:
   Ask your mortgage company for a copy of the
    deposit slip reflecting the account number the
    company deposited the funds into, and the
    account documents for that account verifying
    that funds held there neither bore interest nor
    were invested. I did this in 2003, and my
    mortgage company just gave in and transferred
    to me all of the money.
   LESSON: Sometimes it matters more that you are a
    pain in the neck than that the statute applies.
Big Question 4: How quick do I
get the money?
   Not as quick as you would hope for. Once
    again, let us visit paragraph 5 of the standard
    California mortgage, which says,
    “During such repair and restoration period,
    Lender shall have the right to hold such
    insurance proceeds …. Lender may disburse
    proceeds for the repairs and restoration in a
    single payment or, in a series of progress
    payments as the work is completed. ”
   But … it is a “business reality” that a builder is
    not going to do all the work before getting paid
    any of the money.
   It also is a “business reality,” however, that most
    builders are used to working in the environment
    where they are not paid entirely in advance, but
    rather get partial, periodic payments with at least
    some amount withheld until completion.
Your mortgage company understands
   Because your mortgage requires you to rebuild or
    restore your property to good condition after a fire, the
    mortgage company will not hold all the money to the
    end, because that could be a “breach [by the mortgage
    company] of the implied covenant of good faith and fair
   This is lawyer-speak for the company has to play fair
    to avoid getting sued. So you will get the money in
    “progress payments.”
Typical Progress Payments
   A typical progress payment policy is to
     1/3 of the held proceeds up front
     1/3 upon inspection verifying 50% completion
     1/3 verifying 100% completion
Big Question 5 (the last one): Can the
mortgage company just use the money to pay off
the mortgage, even if I do not want them to?

   The short answer: NO. That would also
    be a “bad faith” problem.
So what is the bottom line; what
should I do?
   Read your documents.
   Get in touch with your mortgage company, both
    by telephone and by mail.
   Stay in touch. Be persistent and patient, and be
    polite but firm.
   Keep a diary of the name and contact number
    (& the name of their superior and that person’s
    contact number) of every person you talk to.
   Write detailed letters that include a full recitation
    of prior communications.
When dealing with your mortgage company,
consider emphasizing at least one or more
of the following points:
 Consider emphasizing:

     Without the money, you cannot get their collateral rebuilt.

      Treating you well is good public relations for them, and in this
      “sub-prime crisis” environment they need good PR.

     You likely are not their only borrower who lost a home in this
      community, and if there is a trial to determine if they are treating
      you correctly, then (1) it will be on behalf of ALL of their
      borrowers who lost homes in the wildfire, and (2) every juror will
      be either (a) someone who lost their home, (b) someone who
      knows someone who lost their home, or (c) someone who thinks
      “Oh my goodness I could have lost my home.”
When dealing with your mortgage company,
consider emphasizing at least one or more of the
following points:
   The mortgage company has no reason to be “over-
    collateralized.” Your raw land is part of the collateral,
    and has value of its own. Thus, to some extent, giving
    you money “earlier” than the mortgage company has to
    does not leave the mortgage company completely
    exposed were you to take the money and disappear.
   Ask them to document what happens to the money while
    they have it (does it generate interest, and if not, is it
    invested) – the answer could be uncomfortable for them,
    and if so, that is good for you.
Summary : Q & A
   CAUTION: This has been a discussion of
    how the world works under standard
    California documents. You may not have
    standard California documents.

   Read your documents.
Break Out Sessions
      for Fire Survivors
   Open to 9:30 pm: Firm Stop time
   Upstairs:
     State Farm : Dormer West
     Farmers : Skylight West
     Allstate : Upper Courtside East

 Other Companies: Sanctuary

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