NEW YORK - Homeowners across Long Island are struggling with the cost of rebuilding from super storm Sandy as they wait for banks and mortgage companies to release their insurance settlements more than two months after the storm.
Insurers began cutting checks weeks ago, but most people can't simply cash them. That's because large settlement checks are typically made out to both homeowners and their mortgage lenders. Until banks endorse the checks and release the money, homeowners can't use it to pay repair bills.
The problem largely stems from well-intended mortgage banking practices colliding with the realities of a natural disaster, consumer advocates say. While designed to prevent insurance fraud, the procedures have left homeowners waiting weeks for their insurance money, prompting them to delay repairs or dip into retirement and college funds to pay contractors themselves.
The issue, elected officials and consumer advocates say, has emerged as one of the biggest impediments to rebuilding storm-ravaged neighborhoods.
Insurance companies routinely make settlement checks out to both homeowners and their mortgage lender or loan servicer, which collects payments for mortgage bond investors. Those damaged homes are collateral for loans. If they aren't rebuilt, lenders and mortgage bond investors could lose millions.
To ensure settlements go toward repairs, banks and servicers typically follow rules set by mortgage giants Fannie Mae and Freddie Mac that require the money to be held in escrow accounts and released in installments as work progresses. The banks also regularly inspect repairs and make homeowners prove they are using licensed contractors.
"When a home is damaged, banks are responsible to make sure insurance money is used to restore the property to its original state," said Michael McHugh, president of the Empire State Mortgage Bankers Association, which represents 160 New York lenders.
Homeowners, however, say those measures are agonizing to navigate.
The system, they say, makes it difficult to hire contractors, who sometimes want more money up front than lenders will disburse. Waiting for banks to send inspectors and approve contractors adds to delays, they say. And it takes hours to reach banks and servicers by phone to explain the process.
"We should not have to sit on our hands and leave our houses stripped to our exterior walls while we wait for inspectors," said Michele Insinga of Lindenhurst, N.Y., whose house was flooded.
In normal instances, banks typically get settlement money to homeowners quickly, industry experts said. And some institutions have taken steps to relax their rules. But many banks are struggling to process the volume of settlement checks in Sandy's aftermath. "Some banks are just overwhelmed," McHugh said.
Last month, Gov. Andrew Cuomo struck an agreement with several large mortgage lenders to speed the process of releasing initial payments so homeowners could start repairs. That should help, consumer advocates said.
Yet, servicers are still bound by Fannie Mae's and Freddie Mac's rules. That means many homeowners who receive settlements exceeding $20,000 will still need to submit paperwork, wait for inspectors and get the money in installments.
The agencies have relaxed some regulations since the storm. Freddie Mac, for instance, increased the amount servicers can release up front to borrowers and their contractors to $40,000.