Why is my mortgage company holding back my disaster insurance claim payout money?

After major disasters like Hurricanes Laura, Delta, and Ida, we naturally turn to our insurance companies for prompt responses and accurate damage assessments. Typically, the time between the insurance inspection and the release of payment falls within 30 to 90 days after the disaster.

What you might not expect, however, is your mortgage handler withholding the insurance funds without providing clear details about why.

We have two articles that address this issue and other concerns related to mortgage handlers withholding insurance payouts. In some cases, they may delay access to the funds until they receive a detailed reconstruction, repair, or rebuilding plan with a timeline. In other cases, they may apply the funds to your mortgage to protect their investment. It’s crucial to communicate with your mortgage handler in writing, rather than over the phone or in person.

Freddie Mac and Fannie Mae Holders and Forced Mortgage Payoffs

Here’s how you can advocate for your rights:

Gather Documentation: Collect information from your insurance adjuster, FEMA inspector, and state inspector. If you're hiring a contractor, have them conduct an inspection and provide a materials list, labor timeline, and estimated completion dates.
Propose a Payment Schedule: If the project will take more than a few weeks, suggest a payment schedule to ensure steady progress. Mortgage handlers typically release funds as reconstruction milestones are achieved.

Limitations of Protections for Homeowners

Freddie Mac and Fannie Mae offer some protections but are limited in scope for substantially damaged or condemned homes. Government-backed mortgages like FHA and VA provide additional safeguards, but these may not always be clearly documented.

Privately owned mortgages, however, are not afforded the same protections. Relief after a disaster is at the discretion of the mortgage owners or servicers and follows rules set by the Consumer Financial Protection Bureau (CFPB).

Key Questions for Homeowners

What rights do you have to secure your insurance funds from being used by the mortgage servicer to pay off the loan?
Once you sign a two-party check, what guarantees do you have that your insurance payout won’t be applied to your mortgage balance?
Similarly, how can the mortgage servicer ensure that you will reconstruct a home that is substantially damaged?

To stay informed, visit:

disasterassistance.gov to determine if your home is in a disaster area.
Freddie Mac or Fannie Mae websites to check who owns your mortgage.

Understanding Insurance Policies and Real-World Examples

Most insurance policies state: "Insurance proceeds will be applied to the restoration of the property as long as the restoration and repair are 'economically feasible' and the lender's 'security is not lessened.' If these conditions are not met, the lender may apply the proceeds to the debt."

In many cases, homes determined to be substantially damaged by FEMA and local inspectors do not meet these conditions. For example:

In 2016, a 2,865 sq. ft. home suffered 5 feet of standing water for three days. FEMA and local inspectors required substantial improvements for the home to receive an occupancy permit, including elevation due to its location in a Special Flood Hazard Area (SFHA). Reconstruction costs exceeded $300,000, far above the $150,000 insurance payout. The mortgage servicer, recognizing the homeowner lacked sufficient funds to rebuild, applied the insurance proceeds to pay off the mortgage debt.

Final Notes

To define a situation as a Forced Mortgage Payoff, state government agencies and HUD grant administrators must closely examine servicer and lender policies. Key guidance includes:

FEMA Notice (2011): A letter from the lender or insurer must confirm that the payoff was required and not optional. (Removed by FEMA 2025)
State Grantee Notice: Insurance proceeds used as a forced payoff are not considered a duplication of benefits, provided proper documentation is supplied.

To protect your rights, stay informed and communicate effectively in writing.

FEMA Notice 2011: "The applicant would need to submit a letter from either the lender or insurer advising that the payoff was required and not optional. "

State Grantees Notice: "FEMA National Flood Insurance Program (NFIP) Insurance. Exception: Insurance proceeds taken by a mortgage company as a forced mortgage payoff will not be counted as a duplication of benefits as long as documentation from the mortgage company evidences the payoff was involuntary. The applicant will need to provide a letter from the lender on company letterhead stating that the mortgage payment was force paid or involuntarily paid directly from the insurance company to the lender. "

(updated 3-17-2025)

2017: The Disaster Relief Options for FHA Homeowners page on HUD's website states: Your lender may enter into a forbearance plan, or execute a loan modification or a partial claim, if these actions will help retain and pay for your home."

3.3.4 Insurance
"For borrowers who have hazard or flood insurance, the rules regarding the disbursement of proceeds may be found in the HUD Handbook, which states that the servicer must "ensure that hazard or flood insurance claims are filed and settled as expeditiously as possible." (170) A servicer is required to release promptly to the borrower all proceeds received for coverage of a borrower's personal property, temporary housing, and other transition expenses. A "Viable Repair Plan" is a plan for repairs of a mortgaged Property within the amounts available through insurance proceeds and borrower funds. After approving a Viable Repair Plan, a servicer must expedite the release of insurance proceeds for required home repairs. The servicer may apply insurance proceeds payable for home damages to arrearages and or reduction of the unpaid principal balance if the amount of the proceeds exceeds the costs to repair the damage to the home or if the proceeds are insufficient to repair the damage based on a certified repair estimate and the borrower is unable to show that s/he has additional funds from other sources to complete the repairs."

Mortgage Processes

Notify servicer of disaster and provide good contact information.
Who owns the loan?
- Loans owned by the government-sponsored entities, Fannie Mae or Freddie Mac, or insured by the government (FHA, VA, RHS) will be governed by applicable guidelines. Mortgage relief for other mortgages will be left to the discretion of the owners and servicers of these mortgages.
Loan current or in default.
- For loans in default consider how long the loan has been in default, long-term affordability of the home and whether there is equity to be saved.
Can the homeowner maintain payments?
- No, Forbearance or Other Loss Mitigation Options
- Yes, after a covered loss occurs, the insurance company issues a claim check identifying both the borrower and the mortgage lender, or servicer, as payee. Because the lender or servicer is also a payee, it effectively controls the disbursement of the proceeds to the borrower.
Distribution of Insurance Proceeds.
- Who signs first?
  - Usually, the homeowner is required to sign first.
- What about personal property proceeds?
  - These should be disbursed immediately to the homeowner.
- Are repairs feasible?
  - This will determine whether funds are applied to repairs or the Unpaid Balance (UPB).
- Is there gap funding available through federal, state or local programs?

Many servicers have similar rules on the distribution of insurance proceeds after a natural disaster.

HUD Handbook 4000.1: III. SERVICING AND LOSS MITIGATION
A. Title II Insured Housing Programs Forward Mortgages
3. Programs and Products - Presidentially-Declared Major Disaster Areas
iii. Monitoring of Repairs to Substantially Damaged Homes

(A) Definition
A building is considered to be "Substantially Damaged," as defined in the National Flood Insurance Program (NFIP) regulations, when "damage of any origin is sustained by a structure whereby the cost of restoring the structure to its before damaged condition would equal or exceed 50 percent of the market value of the structure before the damage occurred."

(B) Standard
The Mortgagee must take appropriate actions to ensure that repairs to Substantially Damaged Properties comply with the federal building elevation standards, including those established by FEMA. The Mortgagee must ensure compliance with any higher applicable building elevation standard adopted by the state or local government.

Reference: HUD Handbook 4000.1 2016

FEMA National Flood Insurance Program (NFIP) Insurance

Definition: Payments for loss to dwellings under NFIP insurance policies are deducted from the grant the applicant is eligible to receive. Payments for contents or other expenses are not deducted from the applicant's funding assistance award.
Verification: The Program will collect flood insurance payment information from the applicant through the application process. In addition, the Program will work directly with NFIP to verify the information provided by the applicant.
Exception: Insurance proceeds taken by a mortgage company as a forced mortgage payoff will not be counted as a duplication of benefits as long as documentation from the mortgage company evidences the payoff was involuntary. The applicant will need to provide a letter from the lender on company letterhead stating that the mortgage payment was force paid or involuntarily paid directly from the insurance company to the lender.

Private insurance

Definition: All property or casualty insurance, including flood, settlement amounts for loss to dwellings are deducted from the applicant's funding assistance award. Private insurance payments for contents or other expenses are not deducted from the applicant's funding assistance award.
Verification: Insurance proceeds are initially determined by RLHP through applicant provided information. Program applicants will authorize the Program to contact third-party private insurance providers to verify information provided by the applicants within their applications. Third party re-verification will only occur if the applicant self-attests a claim has been filed and the applicant is unable to provide a claim summary.
Exception: Insurance proceeds taken by a mortgage company as a forced mortgage payoff will not be counted as a duplication of benefits as long as the applicant provides adequate documentation. The applicant will need to provide supporting documentation demonstrating the mortgage payment was involuntary and the RLHP will attempt to verify this information with the applicant's mortgage company. Voluntary mortgage payoff using insurance proceeds is a duplication of benefits that will be counted in an applicant's award calculation.

Research Notes, Other documents

HUD FR-6109-N-02: V.A.21. Prohibition on forced mortgage payoff. In some instances, mortgage agreement terms require homeowners to repay the balance of the mortgage loan with assistance received to rehabilitate, reconstruct or elevate the home in order to make the home more resilient. CDBG-MIT funds, however, may not be used to repay a mortgage loan in whole or in part under this type of "forced mortgage payoff" provision. The ineligibility of a forced mortgage payoff with CDBG-MIT funds does not affect HUD's long standing guidance that when other non-CDBG disaster assistance is taken by lenders for a forced mortgage payoff, those funds are not considered to be available to the homeowner and do not constitute a duplication of benefits.

Resource Links:

Research Resources:

Allocations for Community Development Block Grant Disaster Recovery and Implementation of the CDBG-DR Consolidated Waivers and Alternative Requirements Notice.
A Notice by the Housing and Urban Development Department on 02/03/2022

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