How can a mortgagee clause help banking institutions?

When a New Jersey banking institution issues a mortgage loan, it is doing so at great risk. While many borrowers do their best to stay on top of their mortgage payment and see the loan through to the end, the chance always exists that a borrower could default on the loan. This situation could leave the bank in a difficult spot, but with the right protections, like a mortgagee clause, these institutions could help decrease the chance of losses.

A mortgagee clause helps the lender, also known as the mortgagee, by stating that the homeowner’s  insurance provider will compensate the lender for any damages that may occur to the property in the event that the borrower defaults on the loan. Mortgage loans typically already give the lender the ability to pursue foreclosure proceedings if the borrower defaults. Adding this clause to the insurance policy, however, provides an added layer of protection by not leaving the lender with damaged property to fix out of pocket after foreclosure.

Financial institutions may want to consider this clause for various reasons, including the following:

  • Some individuals may purposefully damage property after it goes into foreclosure because they are already losing the property.
  • Even if the borrower does not damage the property purposefully, accidents can happen that cause damage and lower of the value of the home.
  • Having the insurance provider pay for damages after foreclosure could prevent the lender from unnecessary losses.

A mortgagee clause may have other benefits that New Jersey financial institutions may want to consider. As always, mitigating the risks of issuing mortgage loans could go a long way in ensuring that no unnecessary losses are suffered. If these institutions need more information on such clauses or other ways to protect their loans, working with attorneys experienced in banking law may be wise.