Insurance money received by mortgage lender has to be disclosed before a property is sold through foreclosure
By MaryAnn Spoto | NJ Advance Media for NJ.com
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TOMS RIVER — A mortgage lender has to disclose before a property is sold through foreclosure whether it has insurance money to repair any damages, otherwise there’s the potential for double-dipping, a Superior Court judge has said.
The ruling by Judge Francis Hodgson Jr. in Ocean County attempts to make the foreclosure process – particularly of properties damaged by Hurricane Sandy – a more open and fair one to bidders and the property owner, attorneys for the property owner said.
“By permitting the lender to hold the insurance proceeds secretly through the sale suppresses the fair market value, discourages bidders and allows the lender to potentially retain excess collateral, thereby prejudicing the borrower,” Hodgson said in his decision.
Hodgson ruled on a case involving a home in the Ortley Beach section of Toms River that was in foreclosure before Hurricane Sandy. After the 2012 storm, the property owner, Nicole Strumeier, got $190,000 from her insurance company for flood damage, but her lender, HSBC, kept the money, as permitted by the terms of the mortgage.
Under the mortgage terms, the lender could either apply the money to decrease the debt owed on the property or it could use the money to make the necessary repairs.
HSBC said it would use the money to make the repairs, according to court documents. It said the repairs would be done after the sheriff’s sale.
The legal fight, however, came when HSBC tried to set the price for the house through the sheriff’s sale. HSBC had no plans to disclose to potential bidders that it was holding an insurance check for $190,000 to go toward repairs, the decision said.
Hodgson said that gave the mortgage lender an unfair advantage. Without knowing that there was money available to make the repairs and without a price reduction to reflect the amount of repairs, bidders would be discouraged from making an offer on the property and the lender would wind up purchasing it at a nominal amount, Hodgson said.
Hodgson made the ruling verbally in June but he expounded on it in a written opinion on Oct. 30.
R. Jared Stepp, Esq.
R. Jared Stepp, an attorney for the Westwood lawfirm Denbeaux & Denbeaux that represented the homeowner, said the ruling was a reasonable one.
“His decision was good for homeowners, which is a refreshing change,” Stepp said.
He said that without HSBC disclosing the existence of the insurance funds and not reducing the sale price by that amount, potential bidders would have been at a double disadvantage: they would be making an offer that didn’t reflect true fair market value or they would have been dissuaded from bidding altogether out of concern they couldn’t afford the repairs.
Because the house has not yet been the subject of a sheriff’s sale, Stepp noted the case did not get to the point to test whether HSBC would have disclosed the existence of the funds at any point in the foreclosure process.
“The money should go to the purchaser at sheriff’s sale,” Stepp said. “But if (the bank) neglects to transfer the money to them, that’s a situation where the bank would get a windfall, which is what the judge was trying to avoid.”
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