Report: Forced-Place Insurance Pushing Homeowners Into Foreclosure

If you’ve got a mortgage on your home, it needs to be insured. So if you stop paying that insurance premium, the bank will often go out and get insurance for you. Problem is, according to Bloomberg News, those policies cover less, cost more and will likely just end up putting you into foreclosure anyway.

Bloomberg takes a look at these policies and finds that the loss ratio on forced-place polices (i.e., what percentage of premiums is paid out on claims) is much lower than expected. Rather than paying out $.55 on the dollar, these policies are only paying out twenty cents, suggesting that insurance companies are charging sky-high premiums.

And yet, when the policies do pay out, they often only cover the bank’s losses. So that means you can repair your fire-damaged home, but all the stuff you lost in the fire will likely not be replaced.

Complicating matters even further, Bloomberg reports that the banks — which receive commissions on these policies — often make even more money by reinsuring them. So the bank both takes out a policy to protect the property but is at the same time betting on that policy never paying out.

Fannie Mae has issued a directive to mortgage servicers with Fannie-backed loans telling them to bring down the cost of insurance premiums. But the Bloomberg editors believe more can be done to keep this problem in check.

First, Freddie Mac needs to also demand that its related servicers get competitive bids on insurance policies.

The Consumer Financial Protection Bureau is looking into the matter of forced-place insurance and Bloomberg believes that the CFPB should require servicers, whenever possible, to pick up the homeowner’s lapsed policy. When that’s not a possibility, then the servicer should be required to get bids for lower-cost options.

Also, the Bureau needs to investigate the commissions made by banks on these insurance policies, as they are only an incentive to put already-struggling homeowners into policies they can definitely not afford.

From the Bloomberg editors:

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.

It’s really in the best interest of troubled homeowners to continue to pay the policy they have — or see if they can find a lower-cost one elsewhere, lest they be saddled with forced-place insurance that will just drag them deeper into the hole.

Look Who’s Pushing Homeowners Off the Foreclosure Cliff [Bloomberg]

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  1. shepd says:

    The only surprise here is that the bank is nice enough to buy ONLY the coverage they need to protect their asset, rather than coverage for you. Why would anyone think the bank would cover your contents? The only thing they want is to ensure they can build a new house there that will at a price high enough they can get their money back (as you pay your mortgage off, the bank would need to insure less and less until “value is in the land”).

    The non-shocker here is that the bank isn’t shopping around for it and getting you a good deal. Why would they? They didn’t want the job in the first place!

    • smartypants503 says:

      The banks could care less if you can rebuild or not. I’ve seen a lot of these policies and the coverage is usually at or slightly above the loan balance. So when there is a total loss you get the lot the home was bulit on and a mess to clean up.

    • FatLynn says:

      For the record, most “contents” coverage is akin to renter’s insurance, which is only a few hundred a year for most people.

      • shepd says:

        Yes, I pay $700 a year for relatively full house insurance (In my case, it covers about $10,000 more than the amount owing on the loan–I figure the house would cost about $50,000 less than the insurance is worth to rebuild, leaving me with enough to rebuild my life, or at least the choice of just walking away “scot-free”).

        But I made sure to get a good deal on my house insurance. If someone didn’t bother to get a good deal because they don’t care and have nothing to lose, $700 could easily be $1000 for less coverage by just calling the first company in the phone book.

  2. Riroon13 says:

    A few years ago, flood-zone remapping put our house straight in a zone and required us to buy flood insurance.

    My mortgage company gave us three months to find a policy or they were going to stick us with one they found for us.

    The cost of the policy we found? $300. The cost of the policy the mortgage co was going to stick us with? $3000.

    • Loias supports harsher punishments against corporations says:

      And you KNOW the bank gets a kickback in order to “find” their insurance for you.

      • plasmatop says:

        As someone that works pretty high up for the mortgage department at a bank I can assure you we do not get any sort of kickback when we need to force place insurance.

        • Loias supports harsher punishments against corporations says:

          You misunderstand. The company at large gets rewards for picking company X’s crappy insurance.

          How do you personally find the insurance? From a list of approved vendors?

          • BHall says:

            We need to look at it the same was as binding arbitration, do insurance companies that routinely find against the customer in favor of the bank get more business from that bank?

    • smartypants503 says:

      Not to defend the banks at all, but this is usually because they are submitting the application to the flood program as a “Standard” app. Which means they assume you are below the base flood elevation. If done through an agent you can submit an elevation certificate that shows you are in fact above the base flood elevation even though you are in a flood zone.

      • kgb says:

        Yeah, my parents did this and FEMA still refused to accept it, even after THEY told them how to do it.

    • chizu says:

      Something like that happened to us. Our mortgage company insisted that we didn’t have Flood Coverage on our policy, but our insurance company insisted that we did. This went back and forth quite a few times, with all three parties on the phone, or had my insurance company called and faxed (they documented all these) the proof over to my mortgage company numerous times and my mortgage company insisted that they were going to get us their version of flood coverage regardless. It raised our monthly payment by a lot and ended up dinging our credit because this whole thing was supposed to be resolved, and so when we made our usual payment — they insisted that we HAD TO make the new payment instead. (That actually ended up hurting our credit because we made a payment with the old amount and so that came up as non-payment or something like that.)

      Anyway, this dragged out for seven months, with my mortgage company continued to insist that we didn’t have flood coverage. We got sick of it and had our lawyer contact them. Within one day, our mortgage company said everything was fine and they were going to issue a refund to us immediately.

      Our yearly insurance is about $650? The flood coverage they bought for us was more than $2,800 if I recall correctly. It was something like 2 or 2.5% of our entire mortgage. I’m not sure where these people were finding these insurances. Our credit was hurt, so I could easily see how it would lead to foreclosure for some. I think even though the insurance premium was $2,800, which averaged out to $234 a month — they raised our mortgage by like $4-500 a month.

  3. Loias supports harsher punishments against corporations says:

    One year I changed insurance companies and my mortgage was not informed do to oversight on my broken’s part. They charged me about $1100 for the annual premium, where I normally pay less than $400. I contacted my mortgage holder and gave them the paperwork and it all worked out, but holy crap that was a lot for insurance.

    • Loias supports harsher punishments against corporations says:

      *Broker’s part

    • dolemite says:

      I’m about to switch my homeowner’s over from State Farm to Erie. I’m worried something will go wrong like that.

      • homehome says:

        You just gotta watch your account and don’t depend on others to look out for you, aka “be responsible”

      • Willow16 says:

        Make sure you give your mortgage holder the paper work for the new insurance. Also, make sure that they are listed on the insurance policy.

    • smartypants503 says:

      I used to tell customers “when we switch your homeowner policy to a new company, you might get a notice from mortgage company that alerts you to the fact that your homeowner insurance cancelled.” Now I tell that that they WILL get that letter. No matter what bank the customer’s use they always get that letter. The information on the old policy is the same as the new so there should be zero problem. I’ve never seen an industry so wholly dedicated to making thier customer’s live miserable as I have seen in the mortgage industry.

  4. Lyn Torden says:

    I blame the foreclosure cliff.

  5. Smiling says:

    try an older house in Florida ….. you’re looking at $1500+ a year for regular insurance. If you let it lapse and the bank covers it themselves, you’ll be looking at a $6,000+ policy. Absolutely enough to push people over the edge. Apparently banks don’t want to become insurance agents (not sure why, they’re happy to make a cut on everything else) so the idea is that it’s so expensive it shocks people into action, but sometimes you can’t get blood out of a stone and it just adds to the ultimate debt/judgement.

  6. Prodigy220 says:

    Everyone needs to make sure their mortgage company pays your insurance at its renewal if you are escrowed. I have seen multiple occasions where the mortgage company simply didn’t send in a payment, the policy lapsed, and then they charged the policy holder for forced place coverage.
    I deal with homeowners policies everyday,

  7. Prodigy220 says:

    Everyone needs to make sure their mortgage company pays your insurance at its renewal if you are escrowed. I have seen multiple occasions where the mortgage company simply didn’t send in a payment, the policy lapsed, and then they charged the policy holder for forced place coverage.
    I deal with homeowners policies everyday,

  8. Doubting thomas says:

    This seems far less egregious than many bank policies. You signed a contract when you bought the house. The contract said you would insure it to protect the banks investment. You fail to do so and it gets done for you. Then, surprise surprise, the job that gets done for you is not done with your best interest at heart, but with the best interest of the entity that had to pick up your slack.
    Do your own homework and your own due diligence and you don’t get screwed. Slack off, do nothing and the bank has to protect itself and its investors.

    • Applekid ┬──┬ ノ( ã‚œ-゜ノ) says:

      I’m with you, except, really, the forced placed premiums should really only reflect additional costs relating to someone else doing the paperwork for you to get insurance.

      When they pay out 0.20 compared to 0.55 of every dollar, and priced significantly more than comparable plans just to cover a reasonable “service fee”, them’s shenanigans.

  9. teke367 says:

    When you deal with force placed coverage, you remove the underwriting involved. This is putting all homes they write into the same rating tier, and basically removes many of the credits or other beneficial rating factors, basically, you are getting the worst rate possible. That part isn’t going to change. Also, the company is likely rating on incomplete information, which isn’t going to help the premium either.

    Granted, banks could try harder to get competitive bids, but forced placed insurance is always going be much more expensive. Even when everything is done right, you are basically quote worst case scenarios.

    • smartypants503 says:

      You are 100% correct. However, why does it have to be this way. Of all the institutions that we deal with, banks have more of our information than any.

  10. Supes says:

    If you’re in New York State, go here to tell your forced-placed insurance story:

    http://www.dfs.ny.gov/consumer/csb_tellyourstory.htm

  11. crispyduck13 says:

    When I first got my mortgage last year I got a surprise insurance policy/escrow increase notice in the mail about 3 months after I had started making the mortgage payments. They added a $2000 insurance policy on my mortgage because they claimed I hadn’t insured it myself. Except that I did, effective a full month before closing in fact, and a copy of the policy was included in the closing documents I reviewed. My cost was around $600.

    Those assholes tried to stick me with an extra policy because they claim they never received the policy I bought, what a load of crap.

    • smartypants503 says:

      That is a load of crap, because there is no conceviable way your loan could have closed without an insurance binder.

  12. djrobbo67 says:

    What’s the big deal just do what you’re supposed to have home insurance. That’s part of owning a home just like a car. It is buildt into your escrow. I worked at Bank of America mortgage a few years back and they own their own insurance company just for dumbasses that don’t follow the rules. Consider it a stupid tax!

    • Misha says:

      I get what you’re saying, but when you go all “it’s built into your escrow” you’re forgetting that not everyone has escrow.

  13. plasmatop says:

    Don’t let your insurance lapse and you don’t end up having a problem. Every bank will allow you to escrow your taxes and insurance without charging you a fee. The excuse of, “that makes my mortgage payment too high” is absolutely absurd. You have to pay your taxes and your insurance regardless. Escrowing them just means you don’t have to worry about it and the money is always there in your escrow account to be paid when it needs to be. Most banks will also even give you an interest free loan and pay your taxes and insurance even if you are behind on your payments and your escrow account is negative.

  14. Jawaka says:

    So what’s the solution? If the home doesn’t have insurance and it catches fire how does the bank recover it’s loan? I see nothing wrong with the banks wanting to protect their property. I’m sorry that these people can’t afford insurance but the probably never should have taken out these mortgages in the first place.

  15. gman863 says:

    On my conventional 30-year BoA mortgage, property taxes and insurance are automatically paid through escrow.

    Once per year, BoA does an escrow analysis and adjusts my escrow payment up or down based on the previous year’s taxes and insurance.

    The monthly escrow payment isn’t optional. Unless my current insurance company decides not to renew my policy or I call the agent and cancel it prior to having a replacement policy in place, I fail to see how forced insurance could be a problem.

  16. Sad Sam says:

    Just as a warning touting the bank’s escrow, first you are giving your bank, in most states, an interest free loan, second you are still responsible for paying the insurance and taxes and making sure the bank has proof of payment. Don’t assume that your bank has paid this bill, make sure of it.

  17. CrazyEyed says:

    Having worked in the mortgage servicing industry before, I can say this: The reason why Forced Placed Insurance is so costly and covers squat is because it’s a policy with no underwriting, designed to cover any and all property.

    Anyone who is has received forced place insurance because they neglected to pay their own bills only has their own selves to blame. I’m not saying I lack compassion for anyone this happens to as mistakes can and will happen. I’m simply saying shit rolls down hill because it started when you didn’t pay your own insurance, causing the bank to force place it upon you, thus causing an automatic escrow analysis on a higher premium which increases your monthly payment…what else did you think was going to happen?

  18. joako says:

    How about your bank screws up, pays your insurance company late, the insurance company sends you a refund check, the bank insures you house with their ridiculous insurance and there’s nothing that can be done to fix it… the insurance policy is canceled and can’t be re-instated.

    Fun times. Thank you Chase.

  19. Admiral_John says:

    I don’t see what the issue here is… it was made pretty clear to me during the closing on my house that if I failed to maintain homeower’s insurance that the bank would take out a policy that would only cover the structure and tack the premiums on to my mortgage payment.

    If you don’t want this to happen to you, maintain your own coverage.

  20. NCB says:

    I work with this issue every day. The bank I work for sends out letters, makes phone calls etc. when an insurance policy lapses in an attempt NOT to force place insurance.It’s a big expense for banks. I know because I send some of the letters and make some of the phone calls.

    BTW you won’t believe some of the excuses I’ve heard, from I don’t have the money (but you can pay the more expensive forced placed insurance) to one person that believed that the forced place insurance was a better deal no matter how much I tried to tell her otherwise.

  21. jimbo831 says:

    Not sure that I see the problem here. If you carry insurance like you are supposed to, this is a non issue. For people who fail to keep the required insurance, that is their own fault.