Private lending First lien- mortgage property got fire

[Raj G.]

Hi, I did private lending to one of my friend , he mortgaged his investment property as first lien with me.

agreement was that he will pay interest monthly, and he was almost regular on that.

in July that property got deadly fire, in August beginning he paid my interest for July and didn't mention anything about fire.

today, he called me and told that he wants of pay off(but he didn't pay last month's interest).

I said OK start processing for payoff, but pay me last month's interest asap, then he told me that house went on fire and he is hoping to get insurance money and then he will pay, he has no money to pay interest .

Now, my concern is should I wait and watch or I need to take some pre-action to make sure that I get insurance money since I am on first lien.

[Jeff S.]

The last thing I'd worry about, @Raj G. , is last month's interest. If "deadly fire" means that your collateral was destroyed, then your last recourse could be to a vacant piece of land or a property with a burned out shell on top of it. How much damage was done? Would an as-is sale of the property cover your principal and make you whole?

If you took the advice you asked for in this thread, you used someone who knew what they were doing to originate the loan for you. In this case, your borrower would have purchased a hazard insurance policy naming you as a Mortgagee. If so, you should contact the insurance company.

You will likely receive a check from the insurance company made out to both you and your borrower. This should be deposited into an escrow account you both control to manage rebuilding the house.

If you are not listed as the mortgagee, then you might be screwed. Here, assuming the insurance company doesn't weasel out of their obligation to your borrower, as they will try, he will receive a check made out to him alone that he can do with as he wishes. This could be used to rebuild the house to sell and pay you back. Alternately, he could use it for a vacation on the Riviera, leaving you to foreclose and pray someone pays more than you are owed at the public auction.

If your borrower did not buy insurance then, well, you're both screwed.

Lot's of ifs, Raj.  Which one applies?