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.