Next Bank Scandal? Forced-Place Homeowners Insurance

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If you don’t buy insurance on your house, your mortgage company can legally do it for you. This makes sense, because your home is the collateral for your home loan – without insurance, an accident or natural disaster could wipe out the investment. So your lender insures you’ve got insurance, and if you don’t, they buy it and bill you for the premiums.

It’s called forced-place insurance, and it’s been around for a long time. But some are now accusing lenders of using these policies to generate excessive profits at the expense of hapless homeowners. And thanks to the huge volume of foreclosures and the massive amount of securitized mortgages, these inflated policies could also be impacting Wall Street investments, which in turn might trickle down to Main Street mutual funds.

To better understand the issue and its potential effect on both homeowners and investors, meet a homeowner who was billed $33,000 for one year’s worth of forced-place homeowner’s insurance – insurance that could have been purchased for $4,000. Check out the following news story, then meet me on the other side for more.

After watching that story, you may wonder how a homeowner like Hilda could possibly pay even $4,000 for homeowners insurance: the answer is that she lives in Florida – due to the threat of hurricanes, Florida has notoriously high insurance rates.

How can they justify the high cost of forced-place insurance?

According to mortgage servicing and insurance companies, there are reasons forced-place insurance costs more than a typical homeowners policy: for example, the insurance has to be placed immediately, the mortgage servicer doesn’t have the benefit of normal underwriting guidelines, and the insurance company can’t physically inspect the house. They also point out that homeowners are typically notified, often several times, that expensive forced-place insurance is imminent if they don’t act to renew their coverage.

Hilda Sultan claims she never received any notice whatsoever of the forced-place policy purchased on her behalf, nor did she need it – she had never let her insurance lapse. But even if Hilda didn’t have insurance, ignored warnings from her mortgage servicer and otherwise neglected her responsibilities, is that justification for the mortgage servicer to put her on the hook for $33,000 for $4,000 worth of insurance, then earn $7,000 in commissions for itself by doing it? I was looking forward to asking that question in this case, but as I mentioned in the video, the attorney on the other side of Hilda’s suit refused to comment, citing pending litigation.

The snowball effect: why this might matter to you

While Hilda Sultan isn’t in foreclosure, that’s the situation when you’ll most often encounter forced-place insurance these days. When a homeowner stops making mortgage payments, they stop making insurance payments, which means the mortgage servicer buys forced-place insurance. So virtually every foreclosure has this type of high-priced coverage.

Then there are those who might be close to foreclosure. Many Americans aren’t in foreclosure yet, but are struggling to make their mortgage payments. One expense they may attempt to temporarily forgo in order to make ends meet is insurance. Consider what might happen if they keep paying their mortgage but stop paying their premiums: if they’re in a home like Hilda’s, they’ll soon find themselves underwater by an additional $33,000: money that’s essentially added to their mortgage balance. That alone could create a situation where their house is no longer worth saving, which could theoretically create more foreclosures, which in turn drive down the value of neighboring houses – including maybe yours.

Now consider who wins: the mortgage servicer. While the mortgage service company may have originated the mortgage loan, more often than not, they no longer own it. They just collect the monthly payments and pass them along to the new mortgage owner. If a house is ultimately sold at a foreclosure auction, unlike the mortgage owner, all the servicer has lost is the money they made for servicing the loan – often less than $100 a year. So the servicer has no incentive to help a homeowner avoid foreclosure, for the simplest of reasons: with the mortgage current, they’re making $100 a year in servicing fees but with the home in foreclosure, they might make $7,000 a year in insurance commissions.

And who loses? In a foreclosure, the mortgage owner. If a homeowner defaults on a mortgage, the ultimate losers are the owners of that mortgage, because they’re the ones who are at risk of not being fully repaid. The house securing the mortgage will ultimately be sold at a foreclosure auction, and the proceeds will go to the mortgage holder. But they’ll only get whatever money is left after expenses – expenses that include the cost of forced-place insurance.

So virtually every foreclosure will include the cost of forced-place insurance, and the ones who ultimately end up paying the grossly inflated cost of forced-place insurance are the mortgage holders. Many people might say, “So what?” because they logically assume that it’s the big banks that are the mortgage holders. After all, aren’t they the ones who lent out the money in the first place?

While it’s true that big banks and other lenders did originate millions of mortgage loans, shortly after these loans were created, many were bundled with other mortgages and sold on Wall Street in the form of a mortgage-backed securities. In other words, the lenders cashed out. They still service the loans – and perhaps collect commissions for forced-placed insurance – but they no longer own them.

So who does own the trillions of dollars in mortgage-backed securities generated by Wall Street? Pretty much everyone. Individual and institutional investors all over the world own American mortgage-backed securities. And among those institutional investors are many bond mutual funds, including perhaps those in your 401k at work.

Bottom line? In many cases, it’s investors on both Wall Street and Main Street who pay the bill for insanely-priced forced-place insurance.

As you might imagine, some of these investors don’t like this idea very much. After all, many might argue that the banks’ lax lending standards caused the housing crisis to begin with – one that required a multi-billion dollar taxpayer bailout. Now many of the same banks, in their role as loan servicers, are making a killing in insurance transactions that are self-serving.

While forced-place insurance may not garner the kind of media attention you’ve recently seen about other questionable bank practices like robo-signing foreclosure documents, you’re probably going to see more about it as other media outlets discover what we’ve already uncovered.

Now that you know the story, what do you think? Another bank rip-off or an acceptable path to profits? Share your thoughts by leaving a comment below.

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Comments & discussion

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  • Anonymous

    I’d like to hear what the Lender had to say regarding Hilda’s situation. If it was totally their mistake as Hilda says, it should have been resolved at that point even if she had to go up the chain of command to get it taken of.

  • Anonymous

    This happened to me once. I am part of a condo association and the association has the master insurance policy and every year it renews I have to send my mortgage company the updated policy number. Several years back I wasn’t paying that much attention to my mail and had ignored the couple of warning letters they send out. But when I saw the policy added to my balance I called immediately and proved that I had coverage in place, they cancelled the force placed policy as if it never existed. Hilda must have waited a whole policy term before she noticed, otherwise the company would have had to cancel it back to the start date if she provided proof of coverage…maybe if she was a little more on top of her finances the whole lawsuit could have been avoided.

  • Anonymous

    Sounds like an element of fraud is being practiced by these servicers who have no vested interest in the note at all. I wouldn’t be surprised to hear one day that a lawsuit will be brought forth against the servicers who are involved in such tactics and then they will have to reimburse every commission/premium collected by the benefiting parties and the victims as usual….. the unfortunate homeowners.

  • http://www.facebook.com/people/John-Wawrose/1709992328 John Wawrose

    Yeah about two year ago my ex-wife had a small HELO loan on her house and they demanded she get flood insurance on her house and when out and brought like $2,300 policy for her so she just paid off the loan instead but even then they said it was not paid off because of the $2,300 insurance policy still needed to be paid so she asked me for that money and I paid it and it took $200 and two months to get a refund on it.

    It was CHASE after seeing the video about HILDA above I quess it could have been worse. She was just out $200 and had to ask me for the $2,300 as she emptied her account paying off the loan.

    She was glad she got out from under the HELO and that was like two years ago. Seems things are getting worse out there.

    • Anonymous

      The requirement for Flood Ins is determined by FEMA they advise the mtg company you are in a flood zone. The mtg company then in turn send the cust a ltr advising they now have to add flood ins. The cust is allotted approx 60 days to obtain the coverage. If they don’t respond then they are lender placed, and yes it’s an inflated amount because the mtg company do not send an underwriter to inspect your home. So you get high risk insurance. Also it does not matter if you are in bldg and on the 10th floor if you are in a flood zone and the 1st floor floods your are in a flood ZONE. I agree the rates should be disputed (and mtg companies are making hella lot of money) but most people ignore the letters and put it all on the mtg company, so make sure you have all the facts.

  • MoneyMaker101

    http://4closurefraud.org/2010/11/16/cop-report-congressional-oversight-panel-report-on-foreclosure-fraud/

    If the servicing bank does not have a legal right to foreclose on anyone’s home out there because they do not have possession of the mortgage note, they also do not have a legal right to take out a policy on any note since they do not have any vested interest.

  • Anonymous

    I think this may be happening to my husband and I right now. After being in the house for about 6 months, we refinanced to take advantage of the low rates right now. In the closing process, the mortgage company said that we had to agree to have our loan serviced by an outside company in order to get the low rate so of course we agreed. Well a few months ago, the servicing company sent us a letter saying that we are required to have I think flood insurance, or they will add it themselves. We talked to our homeowners insurance company, and they don’t even offer it. What I don’t understand is how can we close on a refinance, providing them with all of our documents about our current insurance and then they latter say that we don’t have enough coverage?
    What a scam.

  • http://pulse.yahoo.com/_SQDXDPZS5A5MCZLNSRAXB7VO7Q Ankur

    This is Bizarre. Due to some misunderstanding, my insurance premium was not paid, and I also forgot about it. Now the lender has taken 2 years to inform me of this goof up. And they have charged me $6000 for two years when I could get the insurance in the market for $600 – $700 per year. I am not under foreclosure or anything, it was simply an oversight under some extreme situations. Is there any way to correct this oversight instead of paying 500% – 600% penalty over the market rates? My history over the last 10 years has been impeccable and the lender can also see that history ! any inputs would be appreciated.
    Thanks !

    • Anonymous

      I work for a company that does Lender Placed Ins. If insurance was added your mtg payment should have increased, didn’t you call to inquire?  Additionally, you should receive a statement each year it also indicate the charge, so I ‘m puzzled you didn’t know for two years. You also have  local agent. They should have sent you a renewal policy, aren’t you concerned with what a carrier is charging you (the company you chose) each year. I’m sure for auto insurance you know how much you are paying. With such a large investment, it is imperative you keep up with your expenses. I agree 100% the charges are outrageous, but you have to take some responsibility for not responding to the letters and calls you probably received.

  • http://www.facebook.com/profile.php?id=1235085940 Roy Blizzard III

    We have found an interesting thing about forced placed insurance. If your current mortgage servicer is not on record at the county courthouse, then they are committing Insurance Fraud and must pay you back all of your money you paid + interest. However as soon as they pay you back they will start filing all sorts of falsified documents at the courthouse so they can try to keep stealing your money. My wife and I are the first ones to have done this successfully that we know of. Go to Homeowners Against Mortgage Servicing Fraud on Facebook or MSFraud.org for help.