If you’ve fallen behind on your mortgage − as have millions of homeowners nationwide − a key item on your financial checklist is to make sure you don’t get “forced placed” into a high-cost home insurance policy by your lender.
Forced placed insurance, also known as “lender placed” insurance, allows the bank or company that services your mortgage to purchase another home insurance policy if yours is no longer in effect. This usually occurs when the escrow account the bank is holding to pay the mortgage and insurance begins to dwindle or run out.
It’s become an increasingly common occurrence as the unemployment rate remains stubbornly high and homeowners keep falling behind in their payments. The delinquency rate for mortgage loans on most residential properties was 8.4 percent as of the second quarter of 2011, according to the Mortgage Bankers Association.
If the homeowner doesn’t pay the mortgage, the property falls into foreclosure and the bank becomes the owner. And if this happens, a fire, storm or earthquake could wipe out the bank’s investment. Although numbers from RealtyTrac show that default notices and bank repossessions were down 34 percent in the third quarter of 2011 (compared with the third quarter of 2010), foreclosures still affect hundreds of thousands of properties.
"The need for lenders to secure this type of coverage is understandable,” says Michael Barry, a spokesman for the nonprofit Insurance Information Institute. “The homeowner − by the time a forced placed policy is even being considered − is no longer paying the premiums on their homeowner’s insurance policy. So it is left to the lender to purchase this coverage on the homeowner's behalf. In this way, sufficient funding is available to repair the home if the property is damaged."
Advantage: The seller
The problem with your bank buying your home insurance: The lender doesn’t have to act in your best interest. The forced placed insurance policy chosen by the bank usually costs more than the policy you purchased. In fact, it could be 10 times as much, according to a recent investigation by American Banker.
Lenders and insurers argue that forced placed insurance policies cost more than standard policies because they’re bought in times of crisis, which gives the advantage to the seller. The fear is that a homeowner whose house is drifting into foreclosure won’t maintain even the basics such as smoke alarms.
“We agree to insure every lapsed property in a mortgage lender’s portfolio, regardless of condition or occupancy,” says Robert Byrd, a spokesman for Assurant, which provides insurance to mortgage lenders. And in turn, he says, "lender-placed rates must be higher to cover the significantly higher level of risk on these properties.”
But these types of insurance policies aren’t intended to benefit the homeowner and generally don’t provide such items as theft coverage. If a problem should arise, the proceeds of the policy go first to the lender, often leaving little or nothing for the homeowner even if the house burns down while he or she still is in possession of the home. A Texas court ruled in August 2011 that this was legal since the bank was carrying the cost.
Conflict of interest
Forced placed insurance has become a huge market in the weak economy. The gross premiums collected by insurers have nearly quadrupled over the past six years to $5.5 billion in 2010, consumer advocate Birny Birnbaum told the House Subcommittee on Insurance, Housing and Community Opportunity in July 2011.
That gives both insurers and lenders a big incentive to get forced placed insurance for the properties of delinquent homeowners, Birnbaum said. In 2010, insurers paid out just 17 percent of those premiums in claims. Lenders often get a commission from the insurers when properties are forced placed and make “hundreds of millions of dollars” from it, says Roland Tellis, who works for Dallas law firm Baron & Budd, which is investigating the practice.
South Florida attorney Jeff Golant, who represents clients who’ve been forced placed, notes that lenders like Bank of America often have their own forced placed insurers and funnel business to them. Bank of America used to own Balboa Insurance Co., which was bought by BQE Insurance Group United in June 2011 and still sells forced placed policies. Balboa did not respond to a request for comment.
Rush to judgment
Banks often rush to buy this insurance without first using up the money the homeowner still has in escrow with the bank, according to an American Banker investigation of state court filings published within the last year. Repeated calls and emails to the Mortgage Bankers Association, which represents the lenders, drew no response.
Homeowners close to losing their properties can find the additional cost of forced placed insurance to be the tipping point. An example cited by the American Banker investigation refers to a property worth $120,000 that was insured with a $10,000 annual policy. Even if the homeowner succeeds in lowering the mortgage payment, the rise in insurance premiums likely would sink the effort to save the property. One year’s worth of insurance payments stripped away 13 percent of its value, the publication says.
Congress takes a stand
The abuse of forced placed insurance was so obvious that Congress devoted a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act to stopping lenders from pushing homeowners into these policies without proper notice.
The law prohibits lenders from purchasing this insurance unless there’s “reasonable basis” to believe that the homeowner isn’t keeping up with payments. Dodd-Frank also requires the lender to send two notices to the homeowner before obtaining forced placed insurance, and the lender must terminate the forced placed insurance policy within 15 days if the homeowner proves that the property is insured.
But when a homeowner has been forced placed, it’s difficult to reverse the process, says attorney Golant, who's filed a class-action lawsuit against one major bank and insurer. “The mortgage companies generally refuse to remove the charges voluntarily,” he says. “The only possible solution is litigation.”
- Don’t fall behind on your home insurance and mortgage payments.
- Keep all your documentation so you can fight any issues that arise. Worst-case scenario: Go to court and fight the foreclosure by arguing that the mortgage company and insurer helped drive you into default with exorbitant insurance payments and that they may have failed to follow Dodd-Frank guidelines.
- Don’t negotiate over the phone with the bank that holds your mortgage. Your call may be forwarded to the insurer, which has a vested interest in keeping the high-priced policy in force and making as much money as possible, particularly if it already paid a commission to the bank to get your business.
- Communicate with the bank only through certified mail so you’ll have a written record. Pay close attention to where your correspondence is mailed, since it could be going to the insurer instead of the bank.