Expert: Mike Weikle - 7/28/2009

Question
Our mortgage bank is in Troy, Michigan, and they recently became our new mortgager after a refinancing of our home in California. Last month they informed us that the dwelling coverage for our property is not sufficient to cover the current mortgage balance of 416K. They said "The State law for replacement cost allows us to accept the mortgage balance or the total estimated cost to replace the improvements new, whichever is less. As indicated on your appraisal, this is 428K." Our home insurance company says that we carry "218K in dwelling coverage, calculated by Farmers as the Replacement Cost to rebuild your home in the event of a covered loss." Also, according to our Insurance company, in California "it is illegal for a lender to require that the borrower maintain a limit of insurance that covers the loan balance and exceeds the replacement cost determined by the insurance company." They provided me a copy of California Civil Code 2955.5 and they forwarded it to the bank. They also asked the insurance department at the bank to provide details as to why our insurance should be increased (it would be about a $450 increase annually) but the bank has not replied. The bank has threatened to increase our mortgage plus a penalty against us if a change endorsement from our insurance is not made by August 15. That was the bank's "final request."

We feel that the bank's request is illegal. We have notified the FTC about this. If we cave in to the bank's request, do we have any recourse?

Answer
Yes, you may have some avenues available to correct the problem.

The mortgage lender may be going by the appraisal submitted when you obtained your mortgage.  Have you seen the appraisal submitted to the lender when you obtained your loan?  You should ask the insurer how it arrived at the replacement cost.   What is the name of your mortgage bank?  Did you send a certified return receipt letter?  Did you ask either the insurer or the lender how it determined replacement cost?  Is the replacement cost coverage guaranteed by the insurer?  Did the insurer make its own appraisal of your property or did they determine replacement cost based solely on information you provided?



You may want to make a consumer complaint to the California Department of Real Estate.  

Their website is: http://www.dre.ca.gov/cons_complaint.html