NOLA Mortgage Mayhem

Most mortgage lenders gave property owners a 90 day reprieve from making mortgage payments after Hurricane Katrina hit New Orleans, although the approaches taken varied widely from lender to lenders. Now the 90 days are up, the city is still mostly uninhabited, the courts aren't fully functioning, most people are still displaced, only a minority of people are occupying in their mortgaged homes and businesses, often have not yet found new jobs, and the mortgage companies have finally decided that they want to be paid now, in some cases, for all three months of back payments at once. It is a huge mess and figuring out what is fair, or if legal exceptions apply to this extraordinary circumstance, isn't easy.

When one house is destroyed in a disaster, normally, a homeowner's insurance policy pays out, the mortgage is paid, and the landowner is left with a demolished scrap heap on land that is owned free and clear. For people with flood insurance, that is very likely what is going to happen. But, a mass disaster of this scale, where perhaps half of mortgaged homes destroyed will not have flood insurance sincere they were protected by certified levies, and homeowner's insurance policies are going to be trying to deny coverage on the grounds that this was a flood rather than a storm, are virtually unprecedented. Often federal disaster relief will be the most logical place to look for a satisfaction of the mortgage debt, but no one knows for sure when that will be available and in what amounts. Katrina victims also got only the most limited relief from some bureaucratic elements of the new bankruptcy law, so bankruptcy is not as viable an option for many storm victims as it might have been a few months earlier -- and, finding a bankruptcy attorney who is in a position to do the work and finding the money to pay him are not straight forward affairs. Even basic issues in the bankruptcy process like valuing the real estate are problematic -- there are few good post-disaster comparables, and a local government which has no revenues coming in may not be able to process the ones that exist in a timely fashion so that they can influence the market and inform appraisers.

This will also be a moment of truth for many property owners, who will have to decide whether to simply walk away from their properties and let the lender have them (and the headaches that come with them) or whether to try to hold onto them somehow. Often what homeowners facing foreclosure do is refinance, but that is hard to do when you have little or no employment history at your current job (if you have one yet) and the value of the collateral has plummeted.