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Look who’s pushing homeowners off the foreclosure cliff

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  • Look who’s pushing homeowners off the foreclosure cliff

    Opinion: State regulators are finding cases of some lenders artificially inflating insurance costs for homeowners facing coverage gaps due to financial hardship. This 'force-placed insurance' is driving many borrowers into foreclosure.

    July 17, 2012

    One of the more confounding aspects of the U.S. housing crisis has been the reluctance of lenders to do more to assist troubled borrowers. After all, when homes go into foreclosure, banks lose money.

    Now it turns out some lenders haven’t merely been unhelpful; their actions have pushed some borrowers over the foreclosure cliff. Lenders have been imposing exorbitant insurance policies on homeowners whose regular coverage lapses or is deemed insufficient. The policies, standard homeowner’s insurance or extra coverage for wind damage, say, for Florida residents, typically cost five to 10 times what owners were previously paying, tipping many into foreclosure.

    The situation has caught the attention of state regulators and the Consumer Financial Protection Bureau, which is considering rules to help homeowners avoid unwarranted “force-placed insurance.” The U.S. ought to go further and limit commissions, fine any company that knowingly overcharges a homeowner and require banks to seek competitive bids for force- placed insurance policies. Because insurance is not regulated at the federal level, states also need to play a stronger role in bringing down rates.

    All mortgages require homeowners to maintain insurance on their property. Most mortgages also allow the lender to purchase insurance for the home and “force-place” it if a policy lapses or is deemed insufficient. These standard provisions are meant to protect the lender’s collateral — the property — if a calamity occurs.

    Here’s how it generally works: Banks and their mortgage servicers strike arrangements — often exclusive — with insurance companies in which the banks agree to buy high-priced policies on behalf of homeowners whose coverage has lapsed. The bank advances the premium to the insurer, and the insurer pays the bank a commission, which is priced into the premium. (Insurers say the commissions compensate banks for expenses such as “advancing premiums, billing and collections.”) The homeowner is then billed for the premium, commissions and all.

    It’s a lucrative business. Premiums on force-placed insurance exceeded $5.5 billion in 2010, according to the Center for Economic Justice, a group that advocates on behalf of low-income consumers. An investigation by Benjamin Lawsky, who heads New York state’s Department of Financial Services, has found nearly 15% of the premiums flow back to the banks.

    It doesn’t end there. Lenders often get an additional cut of the profits by reinsuring the force-placed policy through the bank’s insurance subsidiary. That puts the lender in the conflicted position of requiring insurance to protect its collateral but with a financial incentive to never pay out a claim.

    Both New York and California regulators have found the loss ratio on these policies — the percentage of premiums paid on claims — to be significantly lower than what insurers told the state they expected to pay out, suggesting that premiums are too high. For instance, most insurers estimate a loss ratio of 55%, meaning they’ll have to pay out about 55 cents on the dollar. But actual loss ratios have averaged about 20% over the past six years.

    It’s worth noting that force-placed policies often provide less protection than cheaper policies available on the open market, a fact often not clearly disclosed. The policies generally protect the lender’s financial interest, not the homeowner’s. If a fire wipes out a house, most force-placed policies would pay only to repair the structure and nothing else.

    Obviously, homeowners can avoid force-placed insurance by keeping their coverage current. Banks are required to remove the insurance as soon as a homeowner offers proof of other coverage. But the system, as the New York state investigation and countless lawsuits have demonstrated, is defined by a woeful lack of clarity, so much so that Fannie Mae has issued a directive to loan servicers to lower insurance costs and speed up removal times. And it said it would no longer reimburse commissions. The recent settlement with five financial firms over foreclosure abuses also requires banks to limit excessive coverage and ensure policies are purchased “for a commercially reasonable price.”

    That’s not enough. Tougher standards should be applied uniformly, regardless of the loan source. Freddie Mac should follow Fannie Mae’s lead and require competitive pricing on the loans it backs. The consumer bureau should require mortgage servicers to reinstate a homeowner’s previous policy whenever possible, or to obtain competitive bids when not.

    The bureau should also prevent loan servicers from accepting commissions or, at the very least, prohibit commissions from inflating the premium. It should require servicers to better communicate to borrowers that their policy has lapsed, explain clearly what force-placed insurance will cost and extend a grace period to secure new coverage. Finally, states should follow the example of California, which recently told force-placed insurers to submit lower rates that reflect actual loss ratios.

    Many homeowners who experience coverage gaps have severe financial problems that lead them to stop paying their insurance bills. They are already at great risk of foreclosure. Banks and insurers shouldn’t be allowed to add to the likelihood of default by artificially inflating the cost of insurance.

    http://realestate.msn.com/look-who-i...eclosure-cliff
    "To go bravely forward is to invite a miracle."

    "Worry is the darkroom where negatives are formed."

  • #2
    Shortly after filing the cars I was making payments on outside the plan were going to have "forced placed" insurance added by the lender. They said they were doing this because my credit score was poor and they needed to cover the balance of their "assets". I had full coverage on these vehicles, but the deductable was high on the comp and collision. I had to lower the deductibles and show them the decleration page showing the changes. They were going to charge me $500/yr for each vehicle! The amount would have been added to the balance of the loan and I would be charged interest as well!
    Filed July 2009. Discharged 08/08/2014. Awaiting closing. We made it !!!! Woo-hoo!

    Comment


    • #3
      Another reason to never own.

      Comment


      • #4
        Originally posted by jacko View Post
        Another reason to never own.
        Disagree, just buy a home well within your finacial means and dont over spend. Thru my BK I was able to keep paying both mortgages, thankfully since I purchased within my means, it was other idoit moves on my part which brought about the BK, lessoned learned.

        Comment


        • #5
          Originally posted by andy158 View Post
          Shortly after filing the cars I was making payments on outside the plan were going to have "forced placed" insurance added by the lender. They said they were doing this because my credit score was poor and they needed to cover the balance of their "assets". I had full coverage on these vehicles, but the deductable was high on the comp and collision. I had to lower the deductibles and show them the decleration page showing the changes. They were going to charge me $500/yr for each vehicle! The amount would have been added to the balance of the loan and I would be charged interest as well!
          We had a loan with American General for 5K. The collateral were two older cars we owned. Although they were adequately insured with our company, AG force placed another policy on top of ours. This included extra fees and interest tucked into our loan. And we never really found out which car they were concerned with--it was not for both.

          Car #1 backfired and caught fire. When 'Hub reported that to AG so they could file a claim on their insurance, he was told: "Oh no, that policy isn't on that car, and YOU have to take care of this. 'Hub ignored them. Several months later the second car broke down and was going to take $1500 to repair--and the car could not be guaranteed. We didn't have that kind of money, so 'Hub let the mechanic have the car in exchange for the troubleshooting and work he had already done.

          AG squawked and sputtered, but by this time we didn't care. They had not worked with us at all with these cars, and when we needed to modify our payment arrangements. We knew by this time that we were going to file, and were very pleased that AG would be discharged.

          AG tried to force us into a reaffirmation agreement by sending the papers to our trustee. He gave them to us at our 341, and said we needed to discuss this with our attorney. And that settled that.
          "To go bravely forward is to invite a miracle."

          "Worry is the darkroom where negatives are formed."

          Comment


          • #6
            This sounds like a form of gap insurance that if required after the loan has commenced should be considered illegal. I know there is some loop hole that likely makes it OK, but if the originating loan requirements did not state this need then the lender should have to pay for their decision to take on the risk.

            Rant over.
            11/23/'10-filed ch 13. 1/6/'11-341, confirmed. Below median. Plan completed 11/30/2015. DISSCHARGED 4/4/2016.JP

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