What Happens When a Tornado Rolls Through a Neighborhood in Foreclosure?

On May 22, 2011, scores of homes in North Minneapolis were obliterated by a devastating tornado.  News footage showed a path of destruction that looked like a war zone with large trees felled, houses without roofs, broken windows and crushed cars and fences. 

North Minneapolis has been dealing with its share of issues over the years, and most recently it has borne the brunt of Minnesota’s foreclosure crisis.  In the storm’s aftermath, and after surveying the damage to this portion of his city, Minneapolis Mayor RT Rybak said:

“If the tornado could have chosen one of the hardest hit places in the state, I think it hit it. It’s really sobering to look at it from the sky, especially because it’s exactly where there have been the biggest issues with unemployment and foreclosure.”

And therein lies the storm within the storm.  As noted in today’s Business Journal, the fact that more than 200 foreclosed homes and vacant buildings were affected by the tornado creates a complicated situation as to who is responsible for repair. 

But what about insurance, you say?  Take a look at most mortgages and they have a clause similar to this one, which comes out of Minnesota’s standard mortgage form:

“If the Property is damaged by fire or other casualty, Borrower must promptly give notice of such damage to Lender and the insurance company. In such event, the insurance proceeds paid on account of such damage will be applied to payment of the amounts owed by Borrower pursuant to the Note, even if such amounts are not otherwise then due, unless Borrower is permitted to make an election….”

Pan down to the exceptions paragraph and you find this:

…if…Borrower is not in default under this Mortgage (or after Borrower has cured any such default) … and…such damage does not exceed ten percent (10%) of the then assessed market value of the Improvements, then Borrower may elect to have that portion of such insurance proceeds necessary to repair, replace, or restore the damaged Property (the “Repairs”) deposited in escrow with a bank or title insurance company qualified to do business in Minnesota, or such other party as may be mutually agreeable to Lender and Borrower.  

Bear in mind that if a property is encumbered with mortgage liens, no insurance company is going to issue a check directly to the property owner alone; rather, such check will be made jointly payable to the property owner and any lienholder(s), and those lienholder(s) will have to consent to the proceeds being used to repair the damaged property.  However, if the mortgage has clauses such as those referenced above, what are the odds that those proceeds are going to be used to repair the property vs. being applied to the past due mortgage amount?  Slim and none.

Now you see why Governor Dayton and other elected officials visited the damaged area on Monday pledging State support, and why Mayor Rybak has called FEMA’s arrival on the scene to be a significant development; because it is likely going to fall upon the Federal, State and local governments to rebuild North Minneapolis, without the aid of any private insurance money.