Mortgage News

Force-placed insurance a lesser known form of mortgage abuse, predatory costs

(8/23/2012) - Among new regulations in the pipeline to tighten the reins on the mortgage industry's dirty tricks are provisions to restrict forced-placed insurance.

Lenders and servicers force-place homeowners insurance, as well as hazard, wind and flood insurance when a homeowner lapses on his or her own insurance policy premiums.

That forces the homeowner to pay for lender selected coverage, often at exorbitant costs.

The practice is legal, but critics charge too few insurers control the market and lenders place the insurance unnecessarily; charge too much and are in cahoots with insurers who pay them commissions, rebates, and other forms of kickbacks to lower the insurance boom on homeowners.

That "monopoly" together with the fact that force-placed insurance has become a major profit center for both banks and insurers, and the "tight relationships between banks, their subsidiaries and insurers," were among the factors seen as driving the excessive rates homeowners are being charged for force-placed insurance, according to Boston, MA-based Gilman Law LLP, which has received complaints from homeowners.

Gilman says borrowers may be entitled to compensation if it is found that their lender engaged in unfair business practice when force-placing insurance on their homes.

Earlier this month, insurance industry professionals at a National Association of Insurance Commissioners said the specialized market is risky and they should be compensated for risks associated with homes that are older, vacant, in disrepair or located in states prone to natural disasters. Official said the small number of companies writing the insurance isn't a monopoly but underscores the high risk with few takers.

"You are going to find very few takers for this kind of risk going forward" if regulators act to curb pricing, said Kevin McKechnie, executive director of the American Bankers Insurance Association.

Lenders require that homeowners carry homeowners insurance at least until the mortgage is paid in full.

Lenders require the coverage to protect them from the risk that consumers typically don't have the cash to cover major losses and would likely walk away from a heavily damaged or destroyed home or one embroiled in a legal suit. Consumer advocates say no homeowner should be without the coverage which protect against a range of potential losses - natural and manmade - that could cost them their shelter.

The mandate has opened the flood gates to what critics says is another form of abuse from the mortgage industry.

"Servicers Continue to Wrongfully Initiate Foreclosures: All Types of Loans Affected" a study by consumer legal groups, found forced placed insurance among the ills servicers continued even while federal and state agencies wrangled with mortgage lenders and servicers over the National Mortgage Settlement.

The Consumer Financial Protection Bureau's recent proposals from tighter mortgage servicing rules includes a provision specifically aimed at forced placed insurance.

The rule says services can only charge borrowers for the insurance when they have a reasonable basis to believe that the borrowers have truly let their own insurance lapse and have given borrowers two notices estimating the cost of the "force-placed insurance.

State regulators get tough

Insurance regulators in several states, including Florida, Louisiana and Kentucky, are investigating the force-placed market to follow up on allegations that lenders have imposed excessive, backdated and unnecessary insurance policies on homeowners who purportedly allowed their policies to lapse.

The force-place insurance industry has boomed during the crash, collecting $5.5 billion in premiums in 2010, more than triple the $1.5 billion collected six years earlier, according to New York Department of Financial Services (DFS) which, after hearings on the issue, has asked the companies to submit new, less expensive rates.

"Our hearings suggest a lack of competition, high prices, and low loss ratios, all of which hurt homeowners. Based on what we learned at the hearings, it is now appropriate for insurers to propose new rates along with justifications for those new rates," said DFS Superintendent Benjamin M. Lawsky.

The industry's income growth coincides with housing-industry spawned Great Recession which left millions of struggling homeowners unable to pay their mortgage, insurance premiums and other household bills.

High cost coverage

Premiums for force-placed insurance can cost three to ten times as much as the cost on a typical homeowners insurance policy, but the coverage offers less protection, according to DFS.

For the money, insurers typically pay out less than 25 cents for every dollar in premiums they collect, compared with about 63 cents on a conventional homeowners policy, according to New York Gov. Andrew M. Cuomo.

Only three companies - American Security Insurance Company (Assurant), QBE Insurance Corporation, and American Modern Home Insurance Company - collect more than 90 percent of force-placed insurance premiums in New York and are among major players in the U.S. as a whole.

"The extra expense of force-placed insurance can push a family over the foreclosure cliff because they have no choice than to pay a lot more for a lot less," Gov. Cuomo said.

"These hearings indicate the possibility that the rates are too high, and for this reason DFS has ordered insurance companies to submit new rates, which could result in savings for homeowners. It's our job to see that rates are priced fairly and homeowners are protected from paying more than what is fair," Cuomo.


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