We are wrapping up our discussion of homeowners insurance and lenders' foreclosure practices. Homeowners in Florida have fallen victim to questionable foreclosure practices, and the media has covered those at length. What distressed homeowners may not realize is that their lenders may also have foisted a homeowners insurance policy on them that was a little questionable, too.
Regulators are investigating a handful of major lenders to figure this out. As we discussed in our last two posts, lenders require homebuyers or homeowners applying for refinancing to have mortgage insurance and homeowners insurance. In a good economy, borrowers will refinance for lower rates or to borrow against equity.
Right now, though, borrowers looking for refinancing are more often than not in some kind of financial distress. They are looking for lower payments or a reduction in the loan -- anything to help them make ends meet. And, because they've been having trouble making their mortgage payments, they gave up on their homeowners policies.
In these situations, mortgage lenders have the right to purchase insurance for the homeowner. In the business, this coverage is referred to as force-placed insurance.
The lender is acting in its own interest, of course, and will continue to do so by charging the homeowner for the policy, either outright or by wrapping the cost into the monthly mortgage payment. And, because the lender isn't actually footing the bill, it won't waste time shopping around. The coverage is often more expensive than if the homeowner had purchased it on his own.
Part of the investigation involves where the lenders (or mortgage servicing companies) buy the coverage, and part involves the pricing structure. Regulators will be looking for conflicts of interest and kickbacks. When you miss insurance payments, your premiums may be higher on your next policy, because you present more of a risk. Investigators have at least one example of the premium being three times what it had been, though, and that feels inappropriate.
Before the foreclosure crisis, the force-placed insurance market was pretty small. Not surprisingly, it has grown significantly over the past few years.
Source: New York Times, "Big Banks Face Inquiry Over Home Insurance," Louise Story, Jan. 10, 2012