Insurance and Tax Monitoring on Notes in Default

Why it matters: If the property's hazard insurance lapses and the property is damaged by fire, storm, or other covered event, there's no insurance payout. Your collateral value drops to the land value minus cleanup costs.

What to do:

• Your loan documents should require the borrower to maintain hazard insurance with you listed as mortgagee or loss payee.
• If the policy lapses, your documents likely give you the right to force-place coverage and charge the borrower.
• Force-placed insurance is expensive ($2,000-$5,000/year for typical SFH) and only covers the structure, not the borrower's contents. But it's cheaper than losing your collateral entirely.
• Check insurance status quarterly at minimum during a default. Your servicer should be monitoring this automatically.

Why it matters: In most states, property tax liens take priority over your mortgage lien. If taxes go unpaid long enough, the government can sell the property at a tax sale, potentially wiping out your mortgage position.

What to do:

• Monitor property tax payments through the county tax collector's website. Most counties allow online lookup by address or parcel number.
• If taxes become delinquent, consider advancing the payment and adding the amount to the borrower's balance (your loan documents should permit this).
• Understand your state's tax sale timeline. Some states sell tax certificates quickly (1-2 years of delinquency). Others have longer redemption periods.
• Never let a tax sale happen on a property where you hold the mortgage. The cost of paying the taxes is almost always less than the risk of losing your lien position.

Why it matters: In many states, HOA liens can take priority over a mortgage lien for a certain amount of past-due assessments. Even where they don't take priority, an HOA can foreclose on its own lien, creating complications for your position.

What to do:

• If the property is in an HOA, monitor dues separately from property taxes.
• Contact the HOA directly if the borrower defaults to understand the balance and any pending actions.
• Consider advancing delinquent HOA dues if the amounts are manageable and the alternative is an HOA foreclosure.

At minimum, check these items monthly during an active default:

• Hazard insurance: active, you listed as mortgagee/loss payee
• Property taxes: current or within the delinquency window
• HOA dues (if applicable): current or monitored
• Property condition: periodic drive-by or inspection (is it occupied? maintained?)
• Utility status: are utilities on? A property without heat in winter can suffer pipe damage

If you have a loan servicer, they should be handling most of this. If you're self-servicing, the responsibility is yours.

A default on your note is bad. A default plus lapsed insurance, delinquent taxes, and a deteriorating property is much worse. Monitoring these items is not optional, it's part of protecting your investment.

The costs of advancing taxes and insurance are recoverable (they get added to the borrower's balance). The cost of losing your collateral to a fire, tax sale, or HOA foreclosure is not.