How mortgage lenders are impeding Californians from rebuilding fire-torn LA

Like thousands of other families, in January we lost our Pacific Palisades home to wildfire. Within minutes, every house on our side of the street was reduced to ashes, while those across the street were left untouched.

Five months later, the harsh realities of recovery have set in. We are entangled in a bureaucratic maze: FEMA, the EPA, Army Corps of Engineers, IRS and a patchwork of state and local agencies.

Our home was covered by two insurance policies — one through California’s FAIR Plan and one through a private company — but the multiple federal, state and private agencies don’t coordinate. Even getting someone on the phone can take hours. It’s turned seeking information into a part-time job.

To their credit, most government employees have been courteous and helpful. But the private sector has been another story. For example, we’ve been approached by opportunists offering to file simple forms that require no negotiation — for a 10% cut. In our case, there’s nothing to negotiate: The home is gone and the settlement is fixed.

Our worst experience, however, has been with our mortgage company.

Soon after the fire, the insurer issued a settlement check, but it was made out to us and the mortgage lender. Following instructions, we endorsed the check and mailed it in for co-signing. Instead, the lender cashed it and kept the money.

Now they’re demanding a mountain of paperwork — permits, architectural plans, contractor invoices — before releasing any funds. They refuse to let us use our insurance settlement to pay for the very services required to begin rebuilding.

Meanwhile, they earn interest on our money. The longer the delay, the more they profit.

We’re not alone. Many fire victims are trapped in the same situation. Assemblymember John Harabedian, with support from Gov. Gavin Newsom, introduced legislation requiring lenders to pay back any interest earned on withheld insurance proceeds to homeowners. The logic is simple: If they delay disbursement intended for rebuilding what was lost, they should not profit from a disaster.

Are these tactics legal? Technically, yes. Like many homeowners, we signed a flurry of complex documents while refinancing — a clause naming the lender as a co-payee on insurance claims buried among them. It was not made clear to us that this allows them to hold the funds in escrow and release them at their discretion.

But California law requires that lenders act in good faith by not unreasonably withholding funds. State civil code makes this clear.  A California appellate court ruling in Schoolcraft v. Ross reaffirms the lender’s responsibilities.  

Harabedian’s bill could make a real difference. In the Palisades, many homes were insured for more than $1 million. At 5% interest, that’s $50,000 a year — up to $200,000 over the four years it can take to design, permit and rebuild a home.

People often ask how they can help. Here’s one answer: Contact Harabedian, Newsom and other state lawmakers. California leaders need to be reminded that the exploitation of disaster survivors must stop.

Losing your home to wildfire is devastating. Losing your insurance settlement afterward is unconscionable.

This commentary was updated to include a link to the correct bill being considered by the state legislature.