Unequal Treatment By Lenders Is Hurting Lahaina Homeowners

Lahaina residents whose houses were destroyed in the Aug. 8 fire are facing wildly disparate treatment of their insurance settlements, a little-known variable that could help determine which residents have enough money to rebuild.

Some mortgage lenders and servicers, who hold onto the sizable insurance payouts, are paying homeowners no interest at all on that money. In the years it is likely to take before Lahaina can be rebuilt, homeowners could miss out on tens of thousands of dollars.

Other homeowners are getting interest, but well under 1%. Some are getting much more than that, putting them in a far healthier position to deal with financial pressures. 

Many Lahaina homeowners are not just on the hook for mortgage payments but also are facing having to pay rent, while dealing with the prospect that their insurance payments are not enough to rebuild what they had.

The unequal treatment is the result of the policies of their mortgage lenders and an arcane thicket of state and federal laws and guidelines. It’s the luck of a draw that no one likely thought about before the disaster.

The homeowners say it’s unfair that their lenders or loan servicers can use their settlements to make money but not return any of it to them, even as they are still on the hook for paying interest on their own mortgages.

“The banks are already making money off my interest,” said Jeremy Delosreyes, who drove his dirt bike around Lahaina on the day of the fire alerting neighbors and trying to put out roof fires with a garden hose before being evacuated himself at about 8 p.m. and watching the town burn from Canoe Beach. “Now they’re going to make more money off the money that goes into this escrow account.”

Many of these homeowners have already gotten insurance checks for their losses. But if they had mortgages, the money must be signed over to their lenders or mortgage servicers, which deposit them in escrow accounts.

That’s where the disparity occurs, from no interest at all to 2% or more. 

It depends partly on what the lenders choose to do — several Hawaii financial institutions say they are voluntarily paying healthy interest rates, even though state law does not require them to.

But many Lahaina homeowners got mortgages from mainland banks. And Hawaii, unlike some states, has no law requiring interest payments. Survivors have no legal grounds to demand more.

A homeowner who got just 2% interest on a $800,000 insurance settlement would have an extra $16,000 after only a year. After five years, it would add up to $83,264.

‘A Big Chunk’

“It’s tens of thousands of dollars,” said Cy Gabourie, who escaped the fire with his wife and dogs on a cane road as propane tanks exploded nearby. “It’s a big chunk.”

Gabourie is getting interest on his escrow account with Northpointe Bank, based in Michigan — but it’s only 0.35%.

Gabourie’s mortgage is backed by Fannie Mae, the entity established by the federal government during the New Deal to promote homeownership.

Fannie Mae’s guide for servicers says that they must deposit insurance checks into an account that bears interest equivalent to what a borrower could get from a savings or money market account. 

After discovering this, Gabourie learned that Northpointe was offering 3.2% interest on money market accounts with balances between $25,000 and $3 million. His insurance settlement fell well within that range.

Gabourie complained to Fannie Mae and the Federal Housing Finance Agency, the government agency that oversees Fannie Mae and Freddie Mac. Why was he only getting 0.35% instead of 3.2%? 

The response: Northpointe was using an average of money market tiers, and that was good enough. Northpointe did not respond to a request for comment.

Gabourie is asking Northpointe for documentation of where the bank has put his money. Are they making a lot more than 0.35% on his insurance settlement?

He said no one else he’s talked to is getting a decent interest rate.

“A lot of people have thrown up their arms and given up,” he said.

After losing his house in the fire, Hugh Winkie discovered that Flagstar, based in Dallas, would pay no interest on the escrow account. 

Winkie and others said that lenders don’t appear to have a process for situations like Lahaina, where the entire town and all of its infrastructure are gone and the horizon for rebuilding is counted in years. Most house losses occur one at a time, and rebuilding can commence much faster, so interest doesn’t matter that much.

But the banks’ lack of familiarity with the problems “does not excuse refusing to discuss a solution and at least make a halfhearted effort to view this catastrophic event as anything other than an opportunity for a money-grab,” Winkie wrote in an email.

Winkie decided to pay off his mortgage with his settlement, so in his case, the lack of interest was not an issue. Flagstar did not respond to requests for comment.

Even if they get no interest on their insurance payouts, homeowners still must pay it on their mortgages. 

“This is disaster profiteering of the most insidious nature,” Winkie wrote, “because how many people in the midst of this kind of life upheaval can think through what their lender is doing to them?”

Sorry, No Interest

Allen Whitaker said he went round and round with Newrez LLC, the mortgage company that holds his escrow account, trying to find out about the interest situation.

“They just kind of pass you off,” he said. 

Eventually, though, he got his answer: no interest.

Whitaker already knows that he’s underinsured, and considering how costs are likely to go up when Lahaina is finally rebuilt, he’s feeling financially squeezed.

If he were getting interest, “I could use that to pay my bills, or just have the money grow more so I could have enough to rebuild,” he said.

Rithm Capital, the parent company of Newrez, did not respond to a request for comment.

Bob Fischer went to a seminar in late 2023 for fire survivors grappling with financial questions. He met a representative of Wells Fargo and asked her how the bank would handle the interest on his insurance payout.

Fischer showed her the Fannie Mae guidelines calling for interest comparable to a savings or money market account. 

“She said, ‘This is a surprise to me. I’ve never seen this,’” he said. She showed it to representatives of the Hawaii Division of Financial Institutions, who also seemed unfamiliar with it, Fischer said.

Several months ago, he signed his check over to Wells Fargo. “To this day,” he said, “I don’t know where my money is.”

He said the bank still has not told him whether it will pay interest. 

“It would be a game-changer for me to get 4%,” he said.

Wells Fargo did not respond to a request for comment.

Fischer and his girlfriend had four ohana units on their downtown Lahaina property. The income from the long-term rentals helped them cover the mortgage payments. But now, of course, that income has evaporated. 

“People are going to start losing their homes,” he said. 

Fischer said that, among the many things he has to deal with, he focused on the interest issue for a while. And then, in the absence of clear answers, “I just kind of gave up.”

Like Winkie, he could pay off his mortgage with the settlement money. But that would mean, if he wanted to rebuild, that he would have to get a new mortgage. He’s close to retiring, so he might not even qualify. And if he did, the interest rate would be far higher — maybe four percentage points — than what he had.

“It’s just frustrating,” he said.

‘We’re Just Asking For Help’

The state financial institutions division heard from more people than just Fischer. The division fielded about a dozen calls from Lahaina survivors about the lack of interest payments, spokesman William Nhieu said. 

All of them had mortgages with mainland banks, he said. 

When Bank of Hawaii told Delosreyes that his insurance check would have to go in escrow, he asked why he couldn’t get a certificate of deposit at 5% to 7%. He said he couldn’t get a straight answer about what the interest rate would be, and so has never signed over the check.

He said Bank of Hawaii has not so far demanded that he sign over the check.

Others are doing the same, he said, holding onto their checks until they expire and the insurance company has to issue another one. 

“The stress level is unbearable,” Delosreyes said. “Nobody’s asking for a handout. We’re just asking for help.”

Bank of Hawaii told Civil Beat that, even though it’s not required to, it has always paid interest on insurance proceeds held in escrow at the regular savings rate.

“Considering the unprecedented tragedy of the Lahaina wildfires, and in an effort to assist the affected community, Bank of Hawai’i substantially increased the interest rate paid on those escrow accounts, and they will continue to gain interest until the homes are rebuilt,” James Moniz, executive vice president, mortgage banking, said in a prepared statement.

Bank of Hawaii declined to disclose the interest rate, but called it “significantly higher than a regular savings account or CD rate.”

First Hawaiian Bank likewise declined to share its rate, citing restrictions on publicly disclosing them, but said it was paying interest on escrow accounts despite no legal obligation to do so.

“We believe this decision is essential to support our customers in their recovery journey,” the bank said in a statement. 

Hawaii State Federal Credit Union put the insurance payments into its highest-yielding savings account, currently paying 2%, said Andrew Rosen, president and CEO.

“This practice ensures that our members’ funds accrue interest during the rebuilding period, which … could extend several years,” Rosen wrote in an email. 

The credit union has also worked with some members to put money into instruments similar to CDs whose interest rates are determined by the length of the investment, ranging from 4% to 5%.

A Key Three-Word Phrase

The obscure rules for paying interest on these types of accounts go back decades.

Fannie Mae, Freddie Mac and similar entities promote home ownership by purchasing mortgages from the original lenders, packaging them with thousands of other mortgages and selling them to investors. This spreads the risk widely, said Kenneth Klein, a law professor at California Western School of Law in San Diego.

But for lenders to participate in this exchange, the mortgages have to comply with the templates established by Fannie Mae and the others. These templates contain a provision that paying interest on insurance escrow accounts depends on the mortgage document and “applicable state law,” Klein said.

That last three-word phrase is key. It means that if the borrower lives in a state that requires that interest be paid, they’re in luck. 

In a 2010 paper in the California Western Law Review, Klein found that several states did have such requirements, including Maryland, Oregon, Utah and Vermont. Other state laws implicitly require interest payments, he wrote — Connecticut, Kentucky, Maine, Massachusetts, Minnesota, New Hampshire and Rhode Island.

Most of these laws appear to still be in force 14 years later. But a federal court found that California’s law — requiring 2% interest — did not apply to escrow accounts set up with insurance payments. Klein said he did not know if other states have added such laws since 2010.

In his 2010 paper, Klein wrote about the unfairness of banks using homeowners’ money to make money and not sharing the profits. 

“There is no justification to allow the bank to get money interest-free and invest it for the bank’s profit,” he wrote. “This is double-dipping at the expense of others. If the money is available to the bank for profit, the bank must pay for the privilege.”

The best a homeowner can hope for, he said, “is that you try to have a conversation and you say, ‘Look, show me the account number where the money is.’ The money is not sitting in a lockbox on somebody’s desk, it’s been deposited in an account.”

It’s possible the bank has restrictions on how the money can be used, he said. But if not, “The bank doesn’t get to hold my money and make money and not give me at least some of that.”

He said that neither the banks nor most borrowers are familiar with the issue, which only comes up after disasters like the Lahaina fire wipe out entire communities. 

“Many states simply do not require the payment of interest,” he wrote in the 2010 paper. “In those that do, the banks are almost always unaware of it.”

The banks may claim that federal law preempts any state laws requiring interest. But Klein wrote that this was “a ridiculous argument,” since there is no federal law stating that lenders don’t have to pay interest if they are obligated to under a contract.

Banks often outsource the management of insurance loss payments to third parties, so when homeowners call their lenders, they can’t find anyone with the authority to agree to anything.

And for homeowners, “the range of problems they’re dealing with, it might not occur to them whether that account is or isn’t generating interest,” he said. “Most of the time, it never comes up because there’s no awareness on either side of the deal.”

Hawaii could pass a law requiring interest payments. It wouldn’t help the Lahaina survivors, but it could make things easier for future homeowners.

“One lesson of climate change,” Klein said. “This is nobody’s last disaster.”

Civil Beat’s coverage of Maui County is supported in part by a grant from the Nuestro Futuro Foundation.