Hurricane Sandy Offers Banks Risk and Opportunities (Update 1)

Updated with comments from North Jersey Community Bank CEO Frank Sorrentino.

NEW YORK ( TheStreet) -- Smart lenders can turn the aftermath of Hurricane Sandy into an opportunity to cement stronger customer relationships.

For starters, many banks in the affected areas have been giving their customers a break by waiving fees. For example, Hudson City Savings Bank -- the main subsidiary of Hudson City Bancorp ( HCBK) of Paramus, N.J. -- waived all overdraft fees, ATM fees and late payment fees for November payments, until Nov. 6.

Valley National Bank of Wayne, N.J. (held by Valley National Bancorp ( VLY)), on Monday offered a new Valley Family Assistance Loan product to its "current loan customers who have an immediate need for cash to cover emergency needs."

Of course, banks are facing a difficult time ahead, as the commercial real estate and residential mortgage loan borrowers that had property damaged by the hurricane go through the process of making insurance claims, waiting for adjusters to settle claims, and then line up contractors to make repairs.

The hurricane "is a big deal for the banks," according to Kevin Petrasic -- a partner in the Global Banking and Payments Systems practice of Paul Hastings, based in the firm's Washington office -- who says that "this is when long-lasting customer relationships can be solidified or destroyed. The challenge for lenders is figuring out how to handle the volume of issues expected as customers try to get their lives together."

According to Petrasic, in addition to handling the volume of hurricane-related problems, lenders also need to figure out how to respond thoughtfully and "identify tailored solutions to particular problems of particular borrowers in unique circumstances. For example, a borrower who has a first-lien mortgage with one bank may have and a home equity loan with a different lender. These are the issues for which institution may have to coordinate with each other to address problems."

North Jersey Community Bank CEO Frank Sorrentino says that his bank quickly "reached out to loan clients in especially hard-hit areas to see if they were damaged or needed anything from us," including assistance with cash flow difficulties resulting from the hurricane. "A lot of people depend on the electronic systems for their banking and a lot of those systems were down. Having a bank like ours which was up and running, where you could communicate with a relationship officer to respond to that and make funds available enabled us to provide a high level of service for our clients," he said.

North Jersey Community Bank also actively monitored customers' accounts during the days following the hurricane. "This storm occurred very close to the first of the months," he said, "so if clients didn't receive the funds they expected but had money going out, we would help them with funds to cover overdrafts."

In its third-quarter 10-Q filing on Thursday, Capital One Financial ( COF) said that "we have significant consumer and commercial loan exposure in Connecticut, New Jersey and New York, the states with the most severe FEMA disaster declarations," including $19.8 billion in consumer loans and $16.6 billion in commercial loans, representing nearly 18% of the company's total portfolio loans as of Sept. 30. The company also said that "some of these exposures are not in the counties that received the most damage."

Capital One also said that "the storm and its aftermath expose these loans to an elevated risk of loss," but that the company had not yet completed its "evaluation of the impact of the storm and do not know the extent of disruption to the individuals, businesses, or properties that support our loans."

"Consequently, it is too early to estimate the potential financial impact on our future earnings," the company said, adding that "historically, insurance proceeds and government support that follow natural disasters have significantly mitigated our losses."

JPMorgan Chase ( JPM) on Thursday that "the potential financial impact from Hurricane Sandy on the Firm will be dependent upon a number of factors, such as the amount of credit extended to affected persons and businesses, the extent of damage, and the borrower's financial condition, including the amount of insurance proceeds and governmental assistance available to them, and that "the Firm is in the early stages of quantifying the potential impact from Hurricane Sandy on its financial results of operations."

Citigroup ( C) on Tuesday said that it was continuing "to assess the impact on Citi's facilities and customers in the affected areas and what impact, if any, the storm could have on its results of operations for the fourth quarter of 2012." Last Sunday, Citigroup waived late payments for 90 days, offered loan extensions for 90 days (and longer, depending on guidance offered by investors with loans serviced by Citi), and suspended foreclosure sales for borrowers in hurricane-affected areas, as defined by the Federal Emergency Management Agency (FEMA).

Loan Modifications and Forbearance

Banks large and small can offer to modify portfolio loans, to allow affected borrowers to delay making loan payments for an extended period of times, by lengthening the term of the loan.

This can be a bit more complicated if an affected borrower has a mortgage serviced by a bank but owned by Fannie Mae ( FNMA) or Freddie Mac ( FMCC), but "Large institutions like Fannie and Freddie have gone through this before and generally pretty adept at putting in place temporary solutions to deal with something like this," according to Petrasic.

Fannie Mae announced quickly on Oct. 30 that "servicers have the ability to grant forbearance to any borrower they believe has been affected by a natural disaster," and said that "within ninety days, servicers are expected to establish contact with homeowners who have been affected and determine if additional assistance is necessary."

Freddie Mac on Friday revised its disaster relief policies, allowing mortgage loan servicers to "automatically suspend for 90-days evictions and foreclosure sales for borrowers with homes secured by Freddie Mac owned-or guaranteed mortgages and located in eligible disaster areas."

Freddie reminded servicers that the mortgage giant's "disaster policies enable servicers to extend forbearance and repayment plans for up to 12 months on a case-by-case basis without prior Freddie Mac approval," and went even further, allowing "servicers to verbally grant 90-day forbearances to all borrowers in eligible disaster areas, including borrowers with mortgages modified under the Home Affordable Modification Program (HAMP) or who are currently in a HAMP or Standard Modification Trial Period Plan."

Processing Insurance Claims

Some commercial real estate and residential borrowers are surprised to find out in the aftermath of major damage that the lender or loan servicer is the loss-payee for insurance payouts.

In most cases it is the borrower who contacts the insurer to place a claim, after which an adjuster visits and works with the insurer to determine the size of the payout. The insurance check is typically sent to the lender or servicer, who then works with the borrower to make sure that the collateral property is repaired, thus protecting the lender's interest.

This process turns into a major amount of work for loan servicers, with so many affected loans and properties, as staff communicates with borrowers, insurers and builders, with additional complication for damaged commercial properties or projects, and the need even to go out and inspect damaged properties at various stages of repair.

In the aftermath of a major natural disaster, it can be quite difficult for a borrower to line up a contractor to do the work, and overloaded contractors may also have difficulty in completing the job as quickly as the borrower might want. An added complication is that it is very often the lender who doles out the money to the contractor as various stages of reconstruction are completed.

This can be a difficult process for all parties, and requires patience and thoughtful consideration, particularly on the part of the lender or servicer. By maintaining close contact with the borrower and the contractor, the lender or servicer can help insurer that the work is completed in a reasonable time frame, thus protecting the interests of all parties, and possibly build a loyal customer relationship.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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