Force Placed Insurance Claims

If you are in Grand Prairie, Arlington, Fort Worth, Roanoke, Keller, Colleyville, Saginaw, or some other place in Tarrant County or Texas and find yourself in some financial trouble, it may be that you find yourself letting your homeowners insurance lapse. If that happens the mortgage lender on your home will buy what is called a force-placed insurance policy and charge you with the premium. There are a bunch of problems when this happens. Two of these problems are real important to you.
First, is that force-placed insurance is very expensive and you are responsible for paying it.
Second, is that a force-place policy covers the mortgage holder not you. In other words, none of your personal property or the contents of the house is covered in the event of a fire loss. Further, if you are sued by someone, the insurance does not cover you. If you get burglarized, you are not covered.
The New York Times published an article on January 21, 2011. The author is Gretchen Morgenson. The title of the article is “Hazard Insurance With Its Own Perils.”
Here is some of what the article tell us.
One of the richest and most secretive sources of profit in the mortgage business is coming under scrutiny.
Investigators into this industry are looking into these force-placed insurance policies.
Benjamin Lawsky, the superintendent of the New York State Department of Financial Services, is investigating institutions that underwrite and sell force-placed insurance. Last fall, his office began sending subpoenas to insurance agents and brokers. Requests for information also went out to insurance companies that write such policies.
Recently, new subpoenas went out to loan servicers that imposed force-placed insurance on borrowers, as well as to insurers affiliated with those services.
Subpoena receivers included Morgan Stanley Mortgage Capital Holdings and CitiMortgage. Affiliates that received requests for information include BancOne Insurance and Alpine Indemnity.
Force-placed insurance appears to be the dirty little secret of the mortgage industry. It is a silent killer harming both consumers and investors while enriching the banks and their affiliates.
A spokesman for Citigroup said, “CitiMortgage does not sell homeowner’s insurance to consumers. If a homeowner does not provide an insurance policy, CitiMortgage secures a policy to protect the interest of the investor. Whenever the homeowner submits proof they have obtained insurance on their own, the lender placed insurance is cancelled.”
Force-placed insurance has exploded during the foreclosure crisis. Whereas it use to generate $1 billion a year, it is now a $6 billion a year business. Much of this growth is on the backs of homeowners.
When homeowners run into financial trouble, they often let their hazard insurance lapse. Because lenders require homeowners to be insured against damage or total loss policies are then forced on the borrowers and added to their monthly mortgage payments.
For those selling force-placed insurance, it is a great game. The policies typically cost at least three times as much as ordinary property insurance. Some borrowers have been charged as much as ten times the prevailing rate.
And as stated in the beginning, force-placed policies do not protect homeowners from loss. Only lenders are covered.
Some borrowers have complained of being forced to buy high-priced insurance even when it is unnecessary. Back in 2007, a borrower with a mortgage serviced by Countrywide Financial described how the lender automatically signed her up for flood insurance even though she had proved that such insurance was unnecessary. Not being able to meet the extra payments, she fell behind on her mortgage. Countrywide then began foreclosure proceedings.
All in all, force-placed insurance represents a major profit center for mortgage servicers and the companies that write the policies. In many cases the mortgage service company and the insurer are affiliated. This sets up the potential for conflicts of interest among mortgage service companies that are suppose to represent investors owning mortgage loans bundled into securities.
A more consumer friendly way to deal with insurance lapses would be for service companies to advance money to the borrower’s existing carrier to keep the policy current. Then, the service company could bill the borrower for coverage.
There are other gimmicks and / or games that go on with these force-placed policies. The bottom line is – know that these are not worth while for the borrower.