We are talking about the foreclosure crisis and homeowners insurance. Florida has felt the pain of both, but some homeowners may have felt the pain of the two in combination. JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are now the targets of an investigation into force-placed homeowners insurance policies.
In our last post, we discussed the differences between mortgage insurance and homeowners insurance. The former protects the lender, while the latter protects the borrower ... and the lender. The current investigation stems from banks taking matters into their own hands when homeowners did not have their own insurance.
When a homeowner can't make his mortgage payments, it makes sense that he would cut back in other areas. What lenders have found is that one of those areas is homeowners insurance premiums.
The insurance provides significant protection to the lender, though, so it behooves the lender -- or the mortgage servicing company -- to help the homeowner acquire insurance. Apparently, in some cases, the lender/mortgage servicing company guided the borrower to an affiliated insurance carrier, where the coverage was as much as 10 times as expensive.
First, by steering customers to affiliates, the lenders are sailing awfully close to the wind -- financial companies are highly regulated, and conflicts of interest are not taken lightly. In the starkest terms, robbing Peter to pay Paul is one thing, but robbing Peter to pay your brother is quite another.
Next, there's the predatory nature of the pricing schemes. Surely a distressed homeowner isn't going to be any more able to keep up with more expensive payments than he was with his old plan. The question then is whether kickbacks were involved.
We'll finish this up in our next post.
Source: New York Times, "Big Banks Face Inquiry Over Home Insurance," Louise Story, Jan. 10, 2012