Exclude the home as collateral to avoid flood Ins.

Has anyone done this?

A hypothetical situation:

Customer has river lot / house.

Land value $300,000
Cottage value 75,000
Loan $100,000

If the security agreement specifically excludes the home would you do this?

I've never had a situation like this so this is just a gut reaction here...no, I wouldn't do it. If the loan goes bad, how do you take the collateral without taking the house? KISS theory seems highly applicable here.

That's my question....but, I've been put in a very akward situation regarding this and know that you can exclude low value buildings when the value is minimal.

$75,000 is NOT minimal, imho. I think that's actually quite a stretch. Past discussions of this here have touched on things like a Home Depot shed worth less that $1000 as being a structure of minimal value. You're talking about an inhabitable dwelling. I don't think that fits the description at all.

My agreement as well --- and my arguement as well!! Sometimes i get so frustrated at this sometimes.

Thanks for the opinion.

Unless the land has separate parcels, I agree.. How would you perfect the lien? I thought that all structures located on the property that will be held as collateral must have flood insurance and that it doesn't matter whether the customer is going to use the improvement, tear it down; as long as it is located in a flood hazard zone, it must be insured.

Unless the "cottage" is a motor home, house boat, or some other type of unattached structure that can be moved out of the way of a flood, it it real property and must be insured. We've debated this extensively & concluded that even a tumble-down barn would have to be insured unless this "building" is razed prior to or as a part of the loan agreement.

I'm pretty sure some would try it at my bank.
Wouldn't the mortgage have to state that the house was not part of the the security agreement or security taken? I thought someone talked of this before.

Sometimes they try and do MH this way here and there's an appraisal with the MH in the file.

You have to be aware of all the tricks they try and pull and bend back their fingers sometimes!

We've done something like this a number of times. Basically, if we have a situation where there is an old MFH on the land, for example, and it's in a flood zone, we would do it as a lot loan, taking no value of the MFH into consideration whatsoever....only the land. Then, on the mortgage, we specifically include at the end of the legal description "excluding a security interest in the 1975 Skyline MFH serial #??????." If the borrower truly lives there and it is not a structure that can easily be moved, they'd have to get flood.

If the mobile home is still titled, taking the land without the MH is easy. If the mobile home has been converted to part of the real property, I would highly recommend that anyone contemplating excluding improvements on the real property from the security interest be in close contact with your attorney.

If you ever have to foreclose - it is going to be a real mess.

I would only do this is if you have a large parcel of land with the house on part of it and the other easily parcelled out for resale if necessary. You only take the unimproved parcel as collateral and leave the improved parcel alone. A normal house and lot with the house sitting in the middle of the lot with no room to build anything else is really just not advisable from a safety and soundness point of view - do you really have any collateral since you can't take the land under the house with out taking the house? I think not.

The numbers provided above probably do not work, but on page 29 of the new Mandatory Purchase Guidelines, it says:

"if the purpose of a loan transaction is to facilitate the purchase of land for subsequent development, and any building (structure) on the real property is of nominal value, the wording of the mortgage must specifically exclude the the building as part of the security for the loan in order to avoid the mandatory purchase requirement."

If I am going to tear down the cottage to develop the land for a multi-family or commercial building, then the cottage has nominal value.

Al

I agree with this post. I have a background in loan review (safety and soundness) prior to coming over to consumer lending compliance. Our affiliate banks have large agricultural portfolios. Anyway, it was not uncommon for farmers to structure loans/title in a similar manner to the one suggested above to avoid obtaining flood insurance.

As long as the home is already on a separately titled parcel of land, this would not be a problem.

Thanks for all the responses - I will stick to my story and say unless the building provides nominal value - then it can not be excluded.

I'd want to be very specific that the land has X value without the house. Does that mean you don't have the dirt under the house, or that you'll provide the borrower a reasonable time to move the house? What about access to the house? Could you sell the do-nut-like land with a big driveway cutting through your dirt?

If the house can easily be moved, maybe, but why invite all the potential problems involved here? (I know, senior lender, good customer, yada, yada, yada.)

Another thought just occurred to me. How do you handle the customer on the news saying "I financed this at the local bank and they recommended excluding the home so flood insurance wouldn't be necessary. Now my family home has washed away."

I saw two interviews last week where homes were total losses and flood wasn't available because the mother of 8 was a renter and the town hadn't agreed to FEMA flood levels yet.

I also have seen several interviews lately where property has flooded and the homeowner said we didn't have flood insurance because the bank said we weren't in a flood zone and didn't' need it..and there also have been several interviews where people living close to rivers, lakes etc. that tried to buy flood insurance but were told since they weren't in a SFHA they couldn't purchase flood insurance.

By excluding the property you aren't doing anyone any favors. As Andy is alluding too, all you are doing is putting in place a mechanism to put liability on your bank should a disaster occur.

And if you don't think there is a snowball's chance that it will happen...look at what's going on in IN (I have lived here for 30 years and on 6/4/08 is the first time that I couldn't get from the south end of town to the north end of town because of flash flood waters, and I'm talking the main thoroughfares being turned into rivers) and the other Midwestern states right now. I would venture a guess that 60 to 70% of the property that has been flooded in our area was not designated in a SFHA...and you are wanting to exclude a property that is.

I'm not trying to exclude the structure - I know what the requirements state - however, I do have a know-it-all loan officer, who called the higher ups, brought the dogs down on us and so forth. You know the drill - they will try anything.

At least they asked before just doing it -

I didn't mean you as in "you" and sorry if it came across that way, but it was meant as you means the financial institution. And yes I know the drill with certain loan officers. In fact I know too many of them....LOL.

Lenders want to lend. Compliance wants to comply. Each needs the other. We've all been there. Good luck.