By: Lance T. Denha, Esq.
Anyone who has gone through the foreclosure process will generally discover that the lenders and servicers are not generally in tune and doing all that is necessary for the benefit of the homeowner. In fact, one of the more puzzling aspects of the U.S. housing crisis has been the reluctance of lenders to do more to assist troubled borrowers.
As of late, it has been a common trend to have Lenders place exorbitant insurance policies on homeowners whose regular coverage lapses or is deemed insufficient. These so called forced place insurance policies instituted as a result of lapses in coverage may force homeowners into an accelerated foreclosure due to the higher costs of paying this type of insurance instead of the regular coverage homeowners had previously in place.
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 the lender determines the policy is deemed insufficient. These standard provisions are meant to protect the lender’s collateral which is the homeowner’s property. When the forced placed insurance regulations were instituted, it was not anticipated that these rules would cause additional burdens to be placed on already stressed homeowners. The rationale was that the existing insurance should already be sufficient.
This type of action by lenders has been brought to the attention of state regulators and the Consumer Financial Protection Bureau, which is considering rules to help homeowners avoid unwarranted “force-placed insurance.” The typical scenario involves lenders and their mortgage servicers striking a certain type of arrangement with insurance companies in which the banks would agree to purchase extremely high priced policies on behalf of homeowners whose coverage has lapsed. The Bank then advances the premium to the insurer, and the insurer pays the bank a commission, which is priced into the premium. The homeowner is then billed for the premium, commissions and all.
Forced Place Insurance is a lucrative business. 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.
It’s worth noting that force-placed policies often provide less protection than less expensive 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. Mortgage lenders have no contractual interest in personal belongings, so they typically do not insure them.
Homeowners who have voluntarily agreed to maintain insurance as part of their mortgage always have the ability to renew or replace their existing coverage prior to the issuance of a lender-placed policy Homeowners also may choose another insurance company at any time, at which point a lender-placed policy will be cancelled. However, many homeowners who experience coverage gaps have severe financial problems that lead them to stop paying their insurance bills. It seems as if all a homeowner can do at this point without the intervention of the agencies protecting homeowners is to remain current with their coverage, in order to avoid the burden of having forced placed insurance “forced” upon them. Alternatively, they can always purchase new coverage and notify the mortgage servicer promptly upon any change in homeowners insurance. Homeowners always have the right to purchase the insurance coverage of their choice and their failure to do so will result in a forced place insurance policy taking effect.