Mitigating risks: Rethinking insurance in servicing in the wake of disaster

HousingWire

Diego Sanchez interviews Mike Cox on disaster response, state-specific coverage, and the future of insurance in mortgage servicing.

Transcript

00:00We are live from MBA Servicing.

00:07My guest today is Mike Cox, CEO of Procter Loan Protector.

00:11Mike, so great to talk to you today.

00:13Diego, thanks for having me.

00:15It's great to be with you here in Dallas.

00:17Yeah, absolutely.

00:18So before we dive in, could you briefly introduce yourself and your company, Procter Loan Protector?

00:24Sure.

00:25My name is Mike Cox.

00:26I'm the CEO of Procter Loan Protector.

00:28We are a company that specializes in providing services and solutions to mortgage servicers.

00:34In the market, it's known as lender-placed insurance.

00:36We provide a lot of escrow services on behalf of our clients.

00:40That includes tracking of homeowners insurance to make sure that the borrower has complied

00:45with the requirements of the mortgage instrument.

00:47When they don't comply, we send out notifications to make sure that they understand that they

00:51need to make some changes.

00:52And ultimately, when they don't, we'll insure the collateral on behalf of the lender.

00:57So insurance is a really hot topic right now.

00:59We were just discussing before we started recording, especially in states like Florida

01:04and California.

01:06So how are you helping your clients with respect to insurance?

01:12Yeah, that's a very good question, Diego.

01:14It is on everybody's mind right now, especially in this business, because affordability is

01:20being impacted by the rising cost of insurance.

01:23Not only do you have rate increases in states that are prone to natural catastrophes, you

01:28have the rapid increase in the values, which increase the insurance on top of it.

01:33So for example, in the state of Florida, with the numerous hurricanes the last couple years

01:37and the wildfires in California, most insurance companies are for-profit companies.

01:43They deploy capital, and the goal is to return an adequate return for the company.

01:49And because of the size of these natural catastrophes, they're really struggling.

01:53So our role is to help the borrower understand that they have this requirement to provide

01:58insurance.

01:59It's also one of the Fannie Freddie requirements, to support the loan.

02:03And when they don't, we try to make sure that we're insuring that property.

02:06Ideally, our insurance is meant to be short-term, because ideally the homeowner is best served

02:12if they buy a homeowner's policy that's going to insure their personal property, their loss

02:16to use, and the proper liability coverages.

02:19So insurance markets are very different from state to state, but a lot of your clients

02:26operate on a national scale.

02:28How do you help them with that issue of different states having different insurance markets?

02:33Well, in our line of business, I think the first thing to understand is the requirement

02:38for the mortgage is pretty consistent throughout the country.

02:42And so the perils themselves have to be included in the policy.

02:46If you take a state like Florida, for example, one of the things that's changed is the homeowner's

02:50carriers have been able to call out hurricane differently than wind.

02:55So for example, if you take a state like Michigan, your policy is likely to have a wind deductible.

03:01And in Florida, you might have two deductibles.

03:03One will be a wind deductible, and then one will be a named storm deductible, which will

03:07be higher.

03:09And so if you look at California, for example, because of the crisis with the wildfires,

03:15the state fare plan is insuring a lot of homes now.

03:18And there are some limitations in the state fare plan that that has, and you have to make

03:23sure that the homeowner is complying with the mortgage, and ultimately that is what

03:28our requirement is.

03:30So we've had several natural disasters that have happened this year.

03:35How does your company, Procter Loan Protector, step in when a natural disaster hits?

03:43Yeah, that's a really good question.

03:46When a homeowner has a loss to their property, it's pretty stressful for them.

03:51So for a lot of times, they haven't had this before, and this is the first time that they've

03:54learned what they've agreed to in their mortgage document.

03:57And what I mean by that is, if you own a home and you buy a policy, you have to add them

04:02as a mortgagee clause.

04:04And the reason for that is the lender wants to make sure that their collateral is going

04:07to be protected.

04:08So ultimately, when you suffer a loss, there is a sequence of events that have to be followed

04:13to make sure you're complying.

04:15And so what we try to do is, there's really two ways that we look at this, because part

04:20of our service side of the business, we call it loss drafts, or it's also managing the

04:24construction draws from an insured loss.

04:27We try to make sure that the borrower understands the requirements, communicate with them clearly,

04:31provide them with some tools to help them navigate through the process.

04:36And then on our lender place side, where we're insuring the property, we have a catastrophe

04:40plan.

04:41So whenever there is an event, we have adjusters that are dedicated to us.

04:45We get the adjuster out to the property as soon as possible.

04:48We get the full report back in, and then we try to push the money out when appropriate

04:52as quickly as we possibly can, because the homeowner is looking at their biggest asset

04:57in most cases, and it's suffered a loss, right?

04:59And so they want to get the property repaired and try to get back to normal as quickly as

05:03possible.

05:04So there are certain states where private for-profit companies are pulling out of the

05:13insurance market, and it's not just California and Florida.

05:16There are other markets where that's happening as well.

05:19How do you see that issue and other issues impacting your business and your clients over

05:27the next two to five years?

05:29Yeah, that's a multi-level question, right?

05:31There's a lot of layers there.

05:32I think from the homeowner's market, there's going to have to be a lot of cooperation between

05:37the states and the insurance companies.

05:41And what I mean by that is in some states, they've been very limited in what they've

05:45allowed the carriers to submit in regards for their premiums.

05:50You might have saw the headlines yesterday.

05:53State Farm filed for an emergency 22% rate increase in the state of California.

05:59That's pretty substantial.

06:01I have no insight on what they're planning to do, but that makes me feel like if it doesn't

06:06get approved, does that mean they're going to pull out of the state?

06:09And if they do, that creates a bigger vacuum, right?

06:11So if you look at certain states like Florida, for example, and I have a home in Florida,

06:16I think that if you strengthen the building codes, you can really help with some of this.

06:22And an example would be, depending on where you live, if you're required metal roofs or

06:26tile roofs versus asphalt roofs, you make the home more prepared for these big events.

06:34And so you won't have a lot of these kinds of losses.

06:37And then when you can mitigate the losses, you can theoretically lower your premiums.

06:41So I think in various areas, it's going to take a lot of cooperation for it to stabilize.

06:48And I think the next couple of years might be a little choppy because one of the things

06:52that I don't know if everybody understands, but we're in the business, we look at the

06:56big catastrophes like Ian and Milton and Helene and the wildfires.

07:00But on average, there's been 75 catastrophes a year or more.

07:04And the insurance industry defines that as any insured loss that generates $25 million

07:09or more in losses.

07:10So we're pretty experienced when it comes to this and a lot of things that we might

07:14not see.

07:15So for example, there might be a convective storm in the Midwest and it might sweep through

07:19Oklahoma or Nebraska, cause widespread loss, but it doesn't necessarily make the news because

07:25it doesn't look like the California wildfires.

07:27But if you live there, it's impactful to you.

07:30Well, Mike, this has been a really interesting conversation.

07:33I want to thank you again for joining me today.

07:35It's my pleasure, Diego.

07:37Nice seeing you.

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