Little known scam called Force-Placed Insurance

If you have a mortgage and you let your homeowner’s insurance lapse, or the bank servicing your loan (“the servicer”) lets it lapse, that very same bank can legally order new insurance called “force-placed insurance” for you. And surprise. It’s not cheap. Just ask Hilda Sultan, of Florida, who was billed $33,000. (see video below)

As a mortgage loan originator for almost a decade, I have never dealt with this in my practice until it happened to one of my past clients. I tried to research the subject objectively, but the further I got, the more examples I found of this inherently abhorrent scam.

In Sultan’s case shown in the video above, EverBank Financial Corp’s servicer (the bank she pays her monthly mortgage and pro-rated homeowners insurance) allegedly let her $4,000 a year insurance policy lapse, replacing it with a $33,000 policy. The insurer, a subsidiary of EverBank called EverInsurance, paid the servicer a $7,100 kickback for giving it such a lucrative policy. Sultan had to pay the servicer, but is now suing them.

What happened to Sultan is an extreme case, and one that is great for television or print because of its shock value. It’s the kind of over-dramatic journalism that anchors us to something we would typically pay little attention to. And in this case, it’s a good thing. 

To be fair, this is something that typically takes place when a homeowner starts to have problems paying their mortgage; maybe a spouse loses a job, there is major illness, or their adjustable rate just went up. And there are those who willingly let their mortgage payments lapse because they have decided to give up; walk away from their property. Let me be very clear, I am not opposed to a bank protecting its asset if a borrower won’t, and it makes sense that the coverage be higher because the home owner may have lost any desire to keep the home in good working order. So, why all the fuss?

If we follow the all-mighty dollar we can start to see why this is big money for the bank servicing the loan.  According to a piece by ABC News, “the force-placed insurance is [a] slightly higher risk — 2 percent or 5 percent [than typical insurance]. But they aren’t charging 2 percent or 5 percent more — they’re charging 100 percent or 200 percent more”, said Bob Hunter, who’s with the Consumer Federation of America.  The average servicer makes just over $50 a year to service a loan, mere pennies compared to the profits they can scam from this insurance. Once again, the bank is the true benefactor of this obscene profit at the cost of the homeowner, and ultimately the investors who have to pay for it.

In an eye-opening article by the American Banker, Diane Thompson of the National Consumer Law Center, suggests that there will be bigger problems in how servicers are handling distressed loans because there’s no arm’s-length transaction, and therefore an incentive for the servicer to push this type of unreasonable insurance. “Servicers and insurers have turned this into a gravy train”, Thompson said.

There is good news on the horizon as the Dodd-Frank act  will require that force-placed insurance be “bona fide and reasonable”. But we have all grown accustomed to this type of regulation meaning nothing to the big banks, and there is no guarantee or clear sign of who is in place to enforce this particular law. In the meantime, loan servicers will continue to have no incentive to cut cost for the benefit of the homeowner or the investors who actually have money on the line.

Through this economic downturn that has hurt so many, the big banks have continued to “create” profits almost out of thin air, and force-placed insurance is just one of many widespread practices that hopefully will be vigorously enforced and eventually corrected.

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