For some homeowners, disputes with lenders over flood insurance proceeds lead to foreclosure
Rebecca Mowbray, The Times-Picayune
Published: Monday, November 01, 2010, 4:59 PM
New Orleans bluesman and actor Chris Thomas King got a last-minute reprieve Monday evening from Bank of America, which had been set to auction his Uptown home in a foreclosure sale on Thursday.
King, a Grammy Award winner best known for his work in the movies O Brother Where Art Thou? and Ray, has been stuck in a dispute with the bank over his flood insurance proceeds from Hurricane Katrina. King says he hasn’t been able to get his lender to release enough of his insurance money to finish rebuilding the Willow Street home he bought in 1998, and can’t carry two mortgages.
A spokeswoman for Bank of America, which took over servicing King’s loan when it bought Countrywide Financial Corp. in 2008, sent an email Monday evening saying that the auction had been postponed. “The foreclosure has been cancelled for this week. We are awaiting the inspection results and, if appropriate, (will) release funds accordingly,” Bank of America Spokeswoman Jumana Bauwens said in an email.
King had not heard the news that the auction had been postponed, but on Monday evening was on the phone with the bank trying to find out if it would release his money after an inspection on Friday had deemed repairs on the home 92 percent complete.
“It’s some light at the end of the tunnel. I’m happy at last that they’re not going to do the guillotine this Thursday, but it doesn’t mean it won’t happen next month,” said King, who is now living his own tale of the blues.
While many New Orleanians got into cash crunches trying to get their lenders to release flood insurance proceeds as they repaired, King’s battle has gone on long enough that his Katrina bureaucratic nightmare has morphed into today’s foreclosure crisis. He has had trouble getting the department that is holding his insurance proceeds to communicate with the department that handles loan delinquencies, and says his situation is crazy because there’s more than enough insurance money to pay the portion of the loan that is in arrears, or to allow him to complete his house, move home and resume paying the mortgage. In short, there’s no reason for him to lose his home.
The Federal Emergency Management Agency, which runs the National Flood Insurance Program, said that flood checks are required to be made out to both the homeowner and the lender when there’s a mortgage on the property, but there are no rules on governing how or when the lender must release the money.
Laura Bartlett, a staff attorney specializing in foreclosures at Southeast Louisiana Legal Services Inc., said that King’s situation is not uncommon. Two or three foreclosure cases out of the 60 to 70 she handles at any given time hinge upon the disposition of insurance proceeds from Katrina, she said, down from six or seven cases at a time a few years ago.
Different mortgages have different rules about how lenders are supposed to handle insurance proceeds, Bartlett said, and often, the lender doesn’t even know. But the incentives are strong for mortgage servicing companies like Bank of America to play hardball. Banks make money on fees from initiating foreclosure proceedings even if it might be a better deal for the homeowner and the investor who ultimately owns the loan to avoid foreclosure, Bartlett said. And if a foreclosure like King’s actually goes to auction on Thursday, the bank will get to keep the insurance proceeds.
King’s experience of having trouble getting the insurance escrow and foreclosure departments to communicate is also common, because the banks are completely overwhelmed in dealing with bad loans, Bartlett said. She advises anybody in a dispute with their mortgage lender to communicate in writing and make their wishes clear about what they would like to happen. If it gets down to the wire, filing bankruptcy could be the best option, because the filing will stop the auction of the property and bring in a third party who can help sort through the issues. “This has been a constant issue,” she said.
After evacuating to Houston for Katrina, King bought a home in Prairieville so his family could remain in Louisiana while they repaired their soggy New Orleans bungalow. By spring 2006, his flood insurance policy had come through with $166,000, an amount King considered adequate to repair his home.
That summer, he signed up a contractor to rebuild and elevate the home for $197,000, and King, whose real name is Durwood C. Thomas, said he was prepared to go out of pocket for the difference until an elevation grant came through. Bank of America’s predecessor, Countrywide, approved the contractor and gave King about $65,000 of his flood money for the first installment of work. But as the contractor moved into the middle of the job, King says the lender wouldn’t release the next installment of money.
The contractor got angry and sued King for not following through on the deal. Although King says he eventually prevailed in court, he spent about $35,000 of his own money defending himself and didn’t recuperate his losses.
In August 2007, Countrywide inspected the house and deemed it 70 percent complete. That same month, King hired another contractor to do $24,500 of work on the house. Countrywide approved the contract, and told King to pay the 10 percent deposit for the job. King wrote the check and expected to his lender to fork over the rest, but Countrywide again left him holding the bag. Not wanting to risk getting sued again by his contractor, King canceled the deal and lost his $2,450 deposit.
Frustrated that the situation was going nowhere, King sued Countrywide to try to force the lender to release his flood money. Countrywide responded by canceling the forbearance that it had granted King on his mortgage after Hurricane Katrina, and won the right to initiate foreclosure proceedings, even though it didn’t actually do so until recently.
Unable to carry mortgages in both Prairieville and New Orleans and angry at his lender, King never resumed paying the mortgage. He said it didn’t make sense to sink more money into an asset of declining value, especially in tough economic times, so the mortgage has been unpaid since the hurricane.
If he could repair the home, King said he and his family could move back in and sell the home in Prairieville, or they could refinance the house on Willow Street to get a more workable deal. But with the home in disrepair, refinancing or buying out the bank loan isn’t an option. At some point, he offered Bank of America a short sale, but he was $7,000 shy of what he needed, so it didn’t work. “As long as the house is damaged, I have no options,” he said.
In late August, he had a breakthrough. King figured out that while Bank of America serviced his loan, Fannie Mae actually owned the loan. He started contacting Fannie Mae, and found a sympathetic woman in the research department who checked out his situation and seemed shocked at his tale. On Oct. 15, Bank of America released $10,400 for repairs, the first money he had received from that institution.
King signed a two-month contract with yet another builder for $31,000 to complete repairs, and says he can be home by Christmas in a financially viable property if Bank of America releases the remainder of his money. But there’s one problem: even as the insurance department is writing him checks, the foreclosure department had already filed the paperwork for the Nov. 4 auction.
If the bank forecloses before the work is complete, King will lose his home and will probably will get sued by his latest contractor. “I have no confidence. I just have to keep struggling,” he said.
King, who wrote about the strength involved in rebuilding of New Orleans in his 2006 album Rise and performed benefit concerts to try to help others, is depressed that his home is the only blighted one on his Uptown block, and is dumbfounded that he’s at risk of losinghis home. He said he thought he was doing the right thing by purchasing flood insurance and by standing up to the bank when it gave him a hard time.
“I hate to be another bluesman that got beat,” he said. “It’s an injustice. If you have an insurance policy and you can’t collect it, then what the hell are we doing?”