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In an average year in the United States, 30,000 homes are lost to fire, flood, or another similar disaster. In 2003, one of those homes was mine. Since that time, I have spent literally thousands of hours counseling hundreds of survivors of other disasters (including wildfires, Hurricane Katrina, and the crash of a military jet into a residential neighborhood) on the unique set of emotional, financial, and legal challenges that define their road to recovery. One of the recurring and yet repetitively unanticipated challenges is the tug of war between homeowners and their mortgage lender/mortgage servicer over money. That challenge is the focus of this article.

This article will sort out the legal validity to each party's position. The issues reduce to six questions: 1. Does the bank have rights in all insurance proceeds, just the proceeds insuring the house itself (as opposed to other commonly insured losses, such as the personal belongings in the house or landscaping and other structures external to the house), or something in-between? 2. To what extent does the bank have rights in insurance proceeds if the balance of those funds exceeds the current outstanding principal balance of the mortgage. Does the bank's rights extend to the overage? 3. As to the funds the bank has rights in, is there a choice available between using the money to rebuild or to pay off/pay down the mortgage, and if there is a choice, does the bank or the homeowner hold the choice? 4. During the time the bank holds whatever money the bank gets to hold, does the money accumulate interest for the benefit of the homeowner? 5. To the extent the money is being used to fund a rebuild, at what interim junctures, if any, must the bank partially release funds? 6. What happens if the bank, while holding the funds, becomes insolvent?

Part II of this article describes the scope of the problem. Part III describes the current legal landscape. Part IV describes how parties actually are behaving, without regard to the legal landscape. Part V proposes a guide to sort out the mess.

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