One homeowner’s insurance almost rose to $490,000 from $160,000 after a lender demanded added coverage. An increasing number of owners are being asked to overpay.
By Evan Halper
Times Staff Writer

April 24, 2005

Marsha Miller had just landed an attractive rate to refinance her small house in Torrance and was close to wrapping up the deal when the mortgage company made a perplexing demand. A representative told her she would need much more insurance on the 1,200-square-foot home. Rebuilding the place after a fire or some other disaster, the company warned, could cost as much as $490,000, the home’s appraised value.

The message was clear: Fail to buy more homeowners insurance, lose the $293,000 loan.

Closing was days away. Miller was confused. Her insurance company had assured her that the almost $160,000 of coverage she had on the house was enough to rebuild the place from the ground up. The mortgage company, expressing concern about its investment, now insisted she carry — at the very least — enough insurance to cover her loan balance in the event the house was destroyed.

“It made no sense to me,” Miller said. “My insurance agent was saying, ‘You don’t need this much insurance. Rebuilding your home would never cost that much.’ ”

The insurance agent was right. The demand the mortgage company was making is actually illegal in California. But, according to consumer calls received by insurers and state regulators, Miller is among an increasing number of homeowners who buy more insurance than they need at the instruction of their mortgage companies.

Consumers are urged by experts to resist such demands. Yet those who don’t know any better are buying the policies and throwing away hundreds — even thousands — of dollars.

Homeowners insurance is based on what it will cost to rebuild a house. In Los Angeles County, that usually amounts to $120 to $200 per square foot, depending on the quality of the home. But in Southern California’s ever-inflating real estate market, a three-bedroom house that would cost $200,000 to rebuild could easily sell for three times that amount.

The value of the land accounts for the difference. The house might burn down, but the land will still be there. Insurance typically pays to rebuild the house and covers some contents.

During the California real estate boom of the late 1980s, lenders were making the same demand: As the prices of homes spiraled upward and buyers were taking on more debt than ever before to get into the market, anxious lenders seeking to do everything they could to protect their investments required clients to be insured up to the purchase price.

Then, state law did not prohibit it. Homeowners forced to purchase such policies saw their premiums jacked up hundreds of dollars for what amounted to phantom coverage. The trend raised concern in Sacramento, where legislators in 1988 passed a law that forbids lenders from requiring clients to buy insurance beyond what it would cost to rebuild a house.

“The state passed the law to say, ‘Timeout. You can’t require homeowners to pay for insurance that has zero value whatsoever,’ ” said Los Angeles real estate attorney Ira Waldman.

The law still stands. But as lenders become bigger, make loans out of state and outsource their California work to employees all over the country, the law often gets overlooked. In most states, where the housing prices are much lower, it is perfectly normal — and legal — to require loan applicants to insure for the entire purchase price. That’s because the purchase price can be less than the cost of rebuilding — something unimaginable in most of Southern California.

Lending officers get confused and make unreasonable demands on their California customers.

“It definitely happens,” said Mark Prather, owner of a Cerritos mortgage company that works with more than 100 lenders. “I’ve run into this situation with a few different lenders. They are handling loans in 11 different states, and they are not familiar with the regulations in all of them. They are making a $500,000 loan and think they need $500,000 of insurance. You have to track down a senior manager somewhere and hope that they know the rules.”

Pete Moraga, a spokesman for the Insurance Information Network of California, has also heard from insurers that this is happening. He said he suspects it is tied to the proliferation of zero-down, interest-only loans in Southern California as lenders seek extra protection for their investments on ever-riskier deals.

“Lenders are probably getting worried that people will just throw them keys after a fire, write it off and say, ‘You own the property. Do whatever you want,’ ” he said. But he adds that they are wasting their time by demanding more insurance. The policies simply won’t help them.

Lenders deny any of this is intentional. Pam Marsh, a spokeswoman for Miller’s lender, Pasadena-based IndyMac Bank, said her case was caused by a simple employee mistake, and the company has strengthened its training policies to make sure it doesn’t happen again. And the California Mortgage Bankers Assn. said the issue hasn’t even been on its radar. “This is the first I have heard of it being a problem,” said board member Rich Gale.

But state regulators are getting calls from consumers confronted with the demand. “Our department provides them with a copy of the [law] and recommends they contact their lender and provide that code section,” said Susie Wong, spokeswoman for the state Department of Corporations. The law allows consumers to recover damages and attorney fees.

Those who don’t know enough to contact the department, however, will find themselves at the mercy of their insurance agent, who may or may not advise them against buying the extra insurance.

“There are insurance companies that would just not question it,” said Prather, the Cerritos mortgage broker. “I would bet the majority of consumers that are running into this actually buy the extra insurance. The typical consumer has no clue and will just go along with the flow.”

Department of Insurance spokesman Norman Williams said there is no law that prohibits an insurance company from selling such a policy if the consumer asks for it. Insurers, however, say their agents will urge consumers only to buy the coverage they need.

Carol Thorp, a spokeswoman for the Automobile Club of Southern California, said that agents there will tell their customers not to buy insurance they don’t need. AAA agents will occasionally give the customer a copy of the law, section 2955.5 of the California Civil Code, to show the lender.

Sometimes even that is not enough. Miller’s loan processor and a customer service official at IndyMac both told her she was mistaken after she challenged their demand for extra insurance. So Miller just bought the policy, paid a $602 annual premium as part of her closing costs and took her case to the Better Business Bureau after the loan closed. It wasn’t until months later, and several letters back and forth between Miller and the lender, that the company finally admitted to making a mistake and refunded her $294, plus an extra $200 for her troubles.

“If I hadn’t been so aggressive, I would still be paying for all that insurance I didn’t need,” she said. “So many people don’t have time to do all that.”

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Owners have the law on their side

One way for homeowners to tell if they are being asked by a lender to carry excessive insurance is to find out how much it would cost to rebuild the home.

A free online resource is http://www.building-cost.net , where the publisher of the National Building Cost Manual has created a thorough calculator that enables users to compute house construction costs in various cities.

Also, talk to a few insurance agents. Instead of telling them how much insurance the lender is requiring, start by asking how much coverage is needed. The insurers should give an accurate assessment of what it would take to rebuild.

If a lender demands a home be covered for more than its replacement value, show the mortgage company a copy of section 2955.5 of the California Civil Code, which clearly states that this is illegal. The code can be found at http://www.leginfo.ca.gov/calaw.html . Click the box next to “Civil Code” and in the search box at the bottom of the page, type in “2955.5.”

Consumers unable to resolve the issue with the lender can file a complaint with the California Department of Corporations. The department can be reached at (866) ASK-CORP. Complaint forms are available online at http://www.corp.ca.gov/comp/complist.htm .

First-quarter home prices rise but at a calmer pace than last year. Buyers’ urgent desire to beat interest rate hikes fuels demand.
By Diane Wedner
Times Staff Writer

April 17, 2005

Reports of real estate’s decline have been greatly exaggerated, to paraphrase Mark Twain.

Southland home prices, especially in the entry-level market, continued to rise robustly during the first quarter of 2005, according to data released Thursday. Home appreciation at the higher end of the price spectrum is slowing compared with last year, but sales are still strong.

Although not on a par with the record-breaking pace of early 2004, the number of home sales across the board is “way above the norm,” said John Karevoll, chief analyst at DataQuick Information Systems, a La Jolla real estate research firm.

Sales of houses and condominiums in Southern California in January, February and March were down 3.3% compared with a year ago, but that still was the second-best first quarter in 17 years.

The median price of a home in Los Angeles County during the first quarter of 2005 was $428,000, up 18.6% from the same period a year ago, according to DataQuick. The median in Orange County was $554,000, up 17.1%.

The slight slowdown from last year’s 20%-plus rate of appreciation in median prices is welcome news, analysts say.

“The pace of appreciation was quite unsustainable in the middle of last year,” Karevoll said. “Right now it looks like we’re headed for a soft landing. No one will get hurt.”

In the million-dollar-plus range, which some experts view as a bellwether of the market as a whole, prices dipped in some areas late last year. Currently, those homes are appreciating again but not at the levels of the last two years, according to DataQuick. The high end is notoriously fickle, however. It can experience home-price depreciation for a few months, then shrug it off and bounce back.

Raphael Bostic, an economist with USC’s Lusk Center for Real Estate, conservatively estimates that home price appreciation could end up at 5% to 7% by year’s end.

The California Assn. of Realtors forecasts a more bullish 15% increase in home prices this year, while California sales are expected to drop 2.5%, said chief economist Leslie Appleton-Young.

“We’ll still see a strong season,” she said.

An array of easy-to-get mortgages, an intense demand for housing — especially at the entry level and in some move-up markets — and a sense of urgency to buy before interest rates climb higher have buyers still flocking to open houses, agents say. Creative financing options, such as negative-amortization loans, have helped even the most credit-challenged borrowers enter the real estate market.

“It’s amazing what’s going on,” said Syd Leibovitch, owner of Paramount Properties in Calabasas. “The population is increasing, there is limited new land to build on, so this may not change any time soon.”

The Inland Empire is leading the pack in price appreciation and home sales, with San Bernardino County posting a first-quarter median home price of $291,000, up 37.3% from the same period a year ago. It was the only county where sales were up for the quarter — by 2.3%. Riverside County saw price gains of 28.5%, although 1.8% fewer homes sold. The two-county area now accounts for a third of all Southland home sales.

The hottest Inland Empire locales for first-time buyers, said Mike Teer of Teer One Properties in Riverside, are Colton, Rialto and parts of San Bernardino, where buyers can find homes for under $300,000. Farther out, in Victorville and Hesperia, first-time buyers who may need to commute long distances can find four- or five-bedroom homes in 1,900 square feet starting at $250,000.

Not all are willing to live so far from their jobs, however. In Los Angeles County, some first-time and move-up buyers are finding less expensive homes in Highland Park, Inglewood, Culver City and Eagle Rock, said David Toyama, head of a Coldwell Banker real estate business in Eagle Rock.

Two of Toyama’s clients, independent TV producer Janet Martinez and her partner, Kate Johnston, a grant writer, wanted to move up from their Highland Park home, which they had bought for $145,000 in 1993. Although their home appreciated nicely in the interim, so did others in Highland Park, and they were priced out of the area.

They opted for Eagle Rock, where they bought a three- bedroom home with an office for $510,000. They sold their Highland Park house for $482,000, and they were able to put $350,000 down. They chose a “hybrid” mortgage, in which the interest rate is fixed for seven years, then turns adjustable. Their monthly payment is now about $800.

Martinez said they looked at about 70 homes online last year and, beginning in October, physically checked out 15 houses. They made three offers on homes they didn’t get before buying the Eagle Rock house in January.

“This market is so crazy and overpriced,” Martinez said. “You feel like you have to act now because there are five bids on every house. It’s easy to get caught in the whirlwind of making an offer because you’re afraid you’ll lose the house.”

The competition is even more intense in the San Fernando Valley. A Sherman Oaks tear-down in a prime location that was listed earlier this month for $750,000 had 54 offers. A client of Coldwell Banker agent Dan Drantch made an offer $110,000 over the asking price but was outbid.

A 750-square-foot house in Reseda recently sold for $25,000 over its $390,000 asking price, Calabasas agent Leibovitch said. First-time Valley buyers seeking bargains — that’s roughly in the $500,000 range — are purchasing in Sylmar, Mission Hills, Van Nuys and North Hollywood, he said.

The San Fernando and Santa Clarita valleys had only 2,455 single-family homes, condos and town houses listed for sale on Thursday, compared with 12,429 listings in May 1997, for example, before the rapid runup in prices, according to the Southland Regional Assn. of Realtors.

Many first-time buyers seeking homes in Orange County are instead purchasing in Los Angeles County. Homes in Norwalk, Bellflower, La Mirada and Whittier still are available for $400,000, said Barbara Kerr, a Fullerton Realty Executives agent. That no longer is the case in Irvine and Orange.

“Entry-level buyers are struggling to get in almost anywhere in Orange County,” Kerr said. “Ten years ago, I called Fullerton Orange County’s best-kept secret. Not anymore.”

Relaxed qualifications and a mountain of mortgage options allow many home seekers who wouldn’t have qualified in the past to buy a home.

One of the most popular loans today — and the one with the greatest potential for problems — is the adjustable rate, negative-amortization loan, said Mitch Ohlbaum, president of Legend Mortgage in Los Angeles.

These negative-amortization loans offer a first-month rate of 1%. The following month, the fully indexed interest rate — about 4.6% — goes into effect. At this point, borrowers can decide to make the larger payment or they can continue at the 1% rate, which keeps the monthly payment low. But that adds to their loan balance each month, eating away at their home equity.

“People are fixed on the cheapest payment they can get,” he said. “They don’t care about the risk.”

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A risky option

How negative amortization works: On a $500,000 home purchase, a buyer puts down $50,000, takes a $400,000 first mortgage and a $50,000 second.

The first mortgage is a 30-year negative-amortization loan with an adjustable rate that starts at 1% and a $1,287 monthly payment. The second is a home-equity loan.

After one month, the 1% on the first rises to the fully indexed rate of 4.6% or more and the monthly payment increases $247 to $1,534, said Mitch Ohlbaum of Legend Mortgage.

The borrower can duck the higher monthly payment by tacking the higher interest rate costs — $2,964 the first year — on to the loan principal. As a result, the borrower ends up with a bigger loan than when the house was purchased.

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First-quarter median prices

Figures are for sales of new and existing single-family homes and condominiums.

Median prices (in thousands)

County First-quarter First-quarter Percent

2005 2004 change

Los Angeles $428 $361 18.6%

Orange $554 $473 17.1%

San Diego $476 $411 15.8%

Riverside $370 $288 28.5%

San Bernardino $291 $212 37.3%

Ventura $525 $446 17.7%

Southern California $428 $357 19.9%

Source: DataQuick Information Systems