Mortgage Scandal Of The Day: Forced-Placed Insurance

In a dark cranny of the mortgage-servicing world a “force-placed insurance” scandal is brewing. When a homeowner’s insurance lapses, the servicer steps in and buys them a new one, at a price several factors higher than their original. And the company they buy it from is essentially themselves with a different name. Now investors are finding out about the incestuous self-dealing and kickbacks and they’re pissed.

Ties to Insurers Could Land Mortgage Servicers in More Trouble [American Banker via Felix Salmon] (Thanks to Jason!)

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  1. Anonymously says:

    Mortgage industry?…kickbacks?….never! Oh wait, yeah, all of the time.

  2. Arcaeris says:

    Wow, how much worse and more crooked is this going to get? How deep does this rabbit hole go?

    • vastrightwing says:

      It’s like the Internet: there is no start and no end. It’s a cloud of intermingled graft and corruption. Let me draw you a mental picture: your local friendly bank is is probably owned by one of the mega bank holding companies (yes, the usual suspects), which in turn are regulated by… you guessed it… which is a financed and regulated by Goldman Sachs alumni. This is just the top, now imagine what happens when the banking industry is regulated by the same people in the banking/financial industry. You end up with this.

  3. The Nerdicle says:

    To be fair, forced-place insurance only goes into effect if:
    1) You buy a home and don’t have coverage start on the day escrow closes
    2) You have coverage but it lapses, and you proceed to ignore the SEVERAL WARNINGS the lender gives you that they will bill you for forced-place coverage.

    Also from an insurance standpoint, forced-place insurance is necessarily expensive — it’s “guaranteed issue” meaning no matter how big of a fire hazard your home or property is, it’s going to get covered.

    However, these are just the facts, Jack. I agree that it’s messed up that these companies are essentially paying themselves for placing this coverage, and it doesn’t surprise me that the slimy-as-hell mortgage industry has been doing this.

    • dragonvpm says:

      False. It can also go into place if the mortgage lender “doesn’t get” a renewal and therefore claims that your policy has lapsed. How strenuously they try to notify you will vary. I had to fight w/ my previous mortgage company over this very problem which I thought was odd since they had my insurance and taxes in escrow. Somehow they managed to collect the money, pay the money, but then once it came down to applying the insurance they couldn’t do it and it was my problem to resolve.

      They tried to add the insurance and they tacked it onto the principle owed so apparently part of their game plan was to count on people not realizing this and not noticing that their principle was creeping up. I did eventually get it resolved and they reversed the charges, but it was a frustrating experience.

      • TuxthePenguin says:

        If they keep claiming that they didn’t “get” it, send it certified mail and get a receipt. If they still claim, inform that you are suing them . Ask the courts to set aside the mortgage and give you clear title. They won’t do it (you’ll probably get some cash out of the judgment), but it’ll scare the mortgage company into doing the right thing.

        • dragonvpm says:

          It was eventually resolved without having to go to court, but it was a frustrating experience and judging by how frustrating they made it I wonder if that’s not part of their plan to frustrate some people into just taking their insurance and paying the extra cost.

          • KaralynK says:

            And if I *were* to do this – take their expensive insurance because it’s too hard to fight – how good would the coverage actually be. I got a “we’ve set up a temporary policy for you because we didn’t get a renewal notice you have 90 days to prove there was no lapse” letter from my mortgage company but nothing showing the terms of this interim coverage.

            If I had a fire or something else on this suspicious coverage I wonder how much I would actually be covered for. It sounds like another consumerist nightmare waiting to happen.

      • KaralynK says:

        This. I literally just two hours ago came back from my annual meeting with our insurance agent and I expressed concern that there didn’t seem to be any way for the mortgage company to automatically get the renewal notice every year when our homeowner’s policy renews.

        My agent said that unfortunately his experience with mortgage companies is that they say they didn’t get it, the agent faxes it over two or three times, they say they didn’t get it, then he asks for a supervisor and emails it directly to a person at the mortgage company.

        This did not exactly ease my fears (that the company will “lose” the paperwork for the full 90 days and then charge me an arm and a leg for lapsed coverage that never actually lapsed) but it was good to hear him admit it and know that he’s on top of it.

      • Ihaveasmartpuppy says:

        Same thing happened to us years ago. We have great insurance with a top notch company, it was clearly a screw-up or scam at the mortgage company.

      • MrEvil says:

        My dad had the same thing happen to him. He had one of the most unscrupulous mortgage servicers in the business (Fairbanks Capital). They kept sticking their insurance on the house in spite of several certified letters my dad sent to them proving he had insurance on the property. Then after they realized they couldn’t get money out of him on that, they then started “losing” his payments and tried to foreclose claiming he was in default. They had every incentive in the universe to do this because my dad hadn’t dipped into the equity on the property, he owed roughly 40,000 on a property that appraised at ~$140,000. Thankfully he (and a bunch of other homeowners in the same situation) managed to get the mortgage servicer called out on their crap in a class action. Thus he was able to keep the house.

    • Tom Foolery says:

      Normally, with a reputable or ethical company, you would be correct. I actually expected to be commenting in defense of lender/forced placed insurance myself, as a lot of things servicers do make sense when you’re looking at them from inside the industry. But some of the things alleged in the article are illegal, or at least unethical– notably placing policies that duplicate a HOA policy or failing to forward the premiums on an escrowed insurance account, then replacing it with forced placed insurance.

      • trentblase says:

        Yes, my parents have this problem with his new condo — the HOA insures the building, but the lender keeps adding insurance. MULTIPLE times they’ve had them reverse it and it has been added back on. Maybe the lender is preying on them because them live in a retirement community.

  4. spindle789 says:

    Crime pays, corporate crime pays better.

  5. PLATTWORX says:

    This almost happened to me a year ago. My insurer just forgot to send Bank of America a renewal of my policy. I got a nice letter saying that since my insurance was about to laspe, they would be buying a policy for me “as a courtesty” and would send a bill. NOT A CHANCE.

  6. SkokieGuy says:

    This one doesn’t bother me so much.

    The clauses in my mortgage that indicated that if I did not maintain insurance, they would buy on my behalf, specifically disclosed that it would likely be at a significantly higher cost and would be of a carrier of my bank’s choosing and that the carrier could have a business relationship with the bank.

    So:
    Contract requires insurance
    Mortgagee agrees
    Contract spells out consequences for not doing what is agreed to
    IF mortgagee doesn’t maintain insurance, the consequence that was spelled out in advance and agreed to happens.

    This is a scandal why?

    • dragonvpm says:

      Mortgage companies either lie about not getting renewals or they are so incompetent that they somehow manage to lose a decent percentage of them and they then charge people for insurance they already have.

      • TuxthePenguin says:

        You do realize there is recourse if they “lie” or refuse to accept your documentation. Sue them.

        No, first send any “proof” via certified mail with a receipt. Then you’ll know (and the court will know) that they received the documents. If they STILL don’t… sue them.

        I’d love to see the mortgage company explain why it won’t admit they received them. And ask for damages, interesting, cost of mailing… heck, ask the court to dismiss the mortgage and give you clear title. All they can say is no…

        • dragonvpm says:

          Of course I realize that there are ways to resolve the issue, but the system is still setup to be frustrating for the borrower and potentially very lucrative for the bank which makes it hard to resist for many banks with less than stellar ethics.

          Taking them to court is a valid approach but certainly isn’t something you want to have to resort to when you’ve been paying your bills. Even having to worry about that is needlessly stressful.

        • trentblase says:

          Don’t forget to ask the court for a pony. It could happen.

    • partofme says:

      Because they’re highly incentivized to get to that point. The example the article gave was that the servicer’s immediate cut (kicked back through a subsidiary) was over a hundred times more than what most servicers made in a year per loan. If some minuscule problem comes up and you could either perform proper customer service and get it fixed without making any extra money… or could say “sorry, that t wasn’t crossed”…. even if it wasn’t the customer’s fault… and make a hundred times more, what would you do?

    • maruawe says:

      this is a scandal because most of the time you are not given notice early enough to get your own. And yes when you first purchase a home you are told about insurance and more than once,But if you have been in the home 10 or twelve years it’s not on your mind as much, in other words most people just forget to renew ,there should be a 30 to 60 day time lapse for you to get your own insurance and cancel the bank/mortgage company insurance. But there is not such clause in their insurance,just that which is bought outside of the bank/mortgage company……..

      • tooluser says:

        What sort of odd, incompetent insurance agent or agency do you have, that they would not offer to renew your policy every year?

        If you are assigned insurance, you can cancel it once you’ve bought your own and shown your lien holder that you are covered.

        Yes, you will pay a price for your own incompetence.

  7. sirwired says:

    I will point out that if there is no information as to if the house is occupied, unoccupied dwelling insurance is crazy-priced. I took out a policy to cover our old house after we moved… it was six times the price of the old policy. And that was AFTER shopping around.

    • Firethorn says:

      That’s because an unoccupied house is far more likely to sustain damage – thieves ripping pipes and wires out to sell the copper, nasty dirty squatters causing damage, vandals, etc… Plus any damage is likely to sit there, so a broken window or hole in the roof quickly leads to water damage, raising expenses.

      • sirwired says:

        Oh, I knew why it was so expensive, I was just mentioning that in the context that it explains a lot of the price difference.

    • Pax says:

      Friend of mine just inherited a house form his father (who passed only three weeks ago). He – well, we, I’m going to be a room-mate there – won’t be able to move in right away, as it will take several months of work to get the place cleared out, cleaned to within a whisker of it’s life, and do a LOT of redecorating and renovating (many rooms still have wallpaper dating from the early 70′s …). Which means the home will not be lived in, during that time.

      However, his brother lives next door, and checks the place – inside and out – literally every day. Nonetheless, the insurance companies my friend has called, won’t even give him a quote to insure the house …!! They just refuse to offer insurance, at ANY price …!!!!

      Fecking crazy, is what that is.

  8. Julia789 says:

    We had this happen with our major national mortgage company almost every year – we repeatedly faxed, scanned & emailed, and sent US Mail copies of our flood policy and other insurance policy WELL before it was due.

    Yet they kept claiming “not to have received it” (despite the clerk confirming on the phone she was holding our fax in her hands and entering it in the system, yet again.) They kept sending us bills for “their insurance” they’d purchased for us, which was much higher.

    It happens almost EVERY YEAR despite our following their submittal instructions exactly.

    • Pax says:

      When you send copies via the Postal service, send them with RETURN RECEIPT service.

      So when they say “we never received the paperwork”, you can smugly answer them along the lines of: “Well, go talk to Bob Smith, who signed for them at precisely 10:43 in the morning on December 11th. Yes, I have that signature right here, in my hand. The original, even.”

      I

  9. Jennlee says:

    I’ve been going through this hell because the mortgage holder “thought” my insurance lapsed at one point 2 years ago (it didn’t). They helpfully bought me a policy that cost about 7-10x what my own policy cost. I do not live in an area that has expensive insurance (no hurricanes, etc), so insurance is pretty affordable, other than this policy, that is. Someone has to be making big money on this sort of thing.

    I was able to provide proof and they canceled that policy but still say I was lapsed for 13 days so I owe them around $100. My insurance agent has provided them proof multiple times that there was no lapse, and they have said they would refund that money but they still are charging me for it. I’ve been going through this hassle for over 2 years. Bastards.

    • teke367 says:

      Look at the insurance contract or renewal, usually at the end of the policy terms, there is the number for the state’s insurance board. You can usually file complaints with them, whether its the insurance carrier, or broker. I imagine the bank’s forced-placed insurance would qualify them to be complained about as well. Perhaps a little nudging from the state would expedite things for you.

  10. teke367 says:

    This isn’t a problem really unless banks are forcing you to take this force-placed insurance when you have other options. As some have noted, this usually happens when you neglect to get insurance, or let it expire (and since most policies will auto renew, usually this happens by not paying your insurance, though it could not be your fault if the insurance company drops you).

    Even if you get to this point, I’m pretty sure you can just get regular insurance, and then the forced-placed policy would get cancelled, I dont’ believe you’d be stuck with the high premium for the whole year.

  11. Blueskylaw says:

    When you hear specials advertised on TV such as buy it at our cost, you know they bought it at an inflated rate from an affiliated company.

  12. Portlandia says:

    This isn’t new. This has been happening for years. It’s probably just occuring more now that there are far more defaults than in prior years.

  13. AustinTXProgrammer says:

    I had to fight with my credit union and insurance agent when my car nearly got collateral insurance at a very high rate. I have since switched insurers (through several companies that primarily deal direct) and never had the problem since. My agent was lousy.

  14. AllanG54 says:

    This is not new. I’ve been an insurance broker for 20 years and banks will force place insurance even if they homeowner has a policy but the bank doesn’t have a copy as proof. I am forever faxing copies to the banks even after I’ve mailed them….even after they’ve PAID the premium for them. They mostly use a company called American Bankers which is set up to cover any and all properties for fire only no matter what shape they’re in or whether they’re vacant which is why the rate is so high.

  15. maruawe says:

    What else can you expect from the greedy mortgage companies. I have heard of companies canceling a homeowners policy just to force purchase of their insurance…If you think that they will give you a break forget about it ….just another ruse to get money from customers

  16. oxbox says:

    Chase kept “losing” the record that I was up to date with my home owner’s insurance. For months they sent me letters saying that they didn’t have a record of my home owner’s policy. Each month, I called them and faxed in the records and each time, they promised they would fix it. Then, they sent me a letter saying they had bought insurance on my behalf at a cost of $5,000 per year (many times more than my current policy). I had to call again and fax my records again. They seemed to finally fix that problem and I haven’t heard from then since regarding this issue.

    • MaxH42 thinks RecordStoreToughGuy got a raw deal says:

      If you haven’t heard from them in a while, that probably means you’ve been written off and sent to collections.

  17. thekevinmonster says:

    A friend of mine had this happen to him. His insurance was canceled due to some fines/whatevers from the city regarding issues about his house that he didn’t correct after he bought it (the lawn hadn’t been mowed while it was sitting as an REO and his front porch was unsafe), and then it was replaced by a policy that was 3x as expensive. They never notified him, either. It just changed and then he got an escrow difference notice several months later.

  18. Me - now with more humidity says:

    This is actually nothing new. Lenders have been doing this for years. Just their way of protecting their interest.

  19. morehalcyondays says:

    This *almost* happened to me after the mortgage company was late on paying the insurance from our escrow account. This is one reason I now pay my own taxes and insurance.

  20. evilpete says:

    yup, it’s been that way for decades…

    the car loan industry does the same thing

  21. Saltillopunk says:

    For the first couple of years of my mortgage, the company would send me a letter about the end of April or beginning of May, stating that it appears that I had not renewed my insurance. Of course not, since I had closed at the end of May and the insurance will be renewed by that anniversary date (I think it was on auto renewal in any case). So I had to call them and inform them “NO, you will not sign me up with your overpriced insurance as I am still covered”. I think after the third year, I lit into the poor representative out of frustration, asking why they keep pestering me when the insurance renewal is more than a month away. After that, the problem had gone away. Idiots! I bet they count on people not being aware and going along with the scam.

    • tooluser says:

      Oh, they’re not idiots…just dishonest.

      But at least they don’t insist on groping you to allow you to continue living in the house.

  22. MikeVx says:

    It seems that Wells Fargo Auto is trying to a version of this to me. I have a loan with them (arranged by the dealer, stupidity on my part, never again) and every year they find something wrong with my insurance and threaten me with massively over-priced insurance, and every year I have to get them to explain what the problem is (the letter NEVER gives an understandable explanation), and get the fix sent from my insurance carrier. I go through this every year. Every. Single. Year.

  23. zzyzzx says:

    Just pay cash for your house and you won’t have this problem!

  24. Santa Monica says:

    Lenders place forced insurance knowing that the property is insured – thus withdrawing monies from accounts and returning them after some 2 months!
    Multiplied by hundreds of thousands they have multimillion $$ free of interest!
    Scandal of the year – legislators & class action lawyers are invited to act