Feds Try To Make Forced-Place Insurance Less Of A Cash Cow For Banks

If you have a mortgage but fail to keep current on your homeowners’ insurance, the bank will just go out and get a “forced-place” policy for you. Problem is, you’ll often pay top dollar for insurance that provides minimal coverage while the bank makes money on commissions from the insurer and fees charged to the homeowner. Now the Federal Housing Finance Agency is looking to make forced-place policies slightly less lucrative for lenders.

The Wall Street Journal reports that the FHFA is looking to enact a ban on the forced-place policy fees charged by banks to homeowners. While the agency doesn’t have the authority to set or limit these fees — that is generally done at the state level — it believes it can tell lenders and mortgage servicers that they can’t charge these fees if they want to do business with Fannie Mae and Freddie Mac.

Mortgage servicers have been criticized in recent years for turning forced-place insurance into a money-making machine that squeezes fees out of already cash-strapped homeowners. A 2012 report found that these policies generally cost significantly more and pay out less than standard homeowners’ policies — usually just enough for the bank to recoup its loss.

Meanwhile, banks often make money in two ways on these policies — commissions from insurers, and by becoming a reinsurer on the policy. Thus, the banks have an interest in putting borrowers into the highest-cost policies so they can earn higher commissions, all while betting that the policy never pays out. The Journal reports that the FHFA regulations would seek to put an end to both of these methods of profiting off forced-place insurance.

Regardless of whether or not the FHFA is able to enact this ban, this story is another reminder to homeowners of how important it is to keep up with your homeowners’ insurance, even when times are tight financially. Whatever short-term savings you might see by not paying your insurer will likely be wiped away — and then some — by the higher costs of forced-place insurance once the bank finds out.