Note: This was originally written by Felix Salmon, and was circulated without his byline. My apologies for the confusion . . .

~~~

American Banker’s Jeff Horwitz has a powerful article in the American Banker. In it, he delves into a rather obscure corner of the mortgage-servicing world: Losses from Force-Placed Insurance Are Beginning to Rankle Investors. About now, you should be asking yourself WhatTF is force-placed insurance?

When a homeowner fails to keep up their insurance premiums on a mortgaged residence, their loan servicer has the option/obligation to step in to buy a comparable insurance policy on the loan holder’s behalf, to ensure the mortgaged property remains fully insured.

Of course, these weasels being opportunistic immoral slugs, abuse the practice. And when the servicer owns the insurer, abusive practices, excessive commissions, and self-dealing transactions have become the norm.

Consider one case found by Horwitz. A homeowner’s $4,000 insurance policy, was paid by the loan servicer, Everbank via escrow. But Everbank purposely let that insurance policy lapse, and then replaced it with a different policy –  one that cost more than $33,000. To add insult to injury, the insurer, a subsidiary of Assurant, paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

That $33,000 policy — including the $7,100 kickback –  is an enormous amount of money for any loan servicer to make on a single property. The average loan servicer makes just $51 per loan per year.

Here’s where things get interesting: That $33,000 insurance premium is ultimately paid by the investors who bought the loan.

These investors are not happy.

Felix Salmon goes into the details on what the banks are doing:

“There are lots of variations on the force-placed insurance scam. For instance, JPMorgan Chase buys overpriced insurance from a third-party insurer, which then reinsures the property with JPMorgan Chase. This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.

Then there’s the practice of back-dating insurance — essentially, buying insurance against an event which you know for a fact hasn’t happened. Horwitz talked to attorney Jeff Golant, who was trying to sort out his mother’s mortgage:

His client was current on her mortgage and claimed the lapse of insurance coverage on her home was the result of her previous insurer’s error. Much of the new policy’s coverage was redundant, Golant said, duplicating flood and wind policies that had remained in place. Moreover, charging her for retroactive hurricane protection, for a year when there had been no significant storms, struck Golant as inherently ridiculous.

“I really thought they’d added an extra digit,” he said.

The National Association of Insurance Commissioners says that policies “should not be back-dated to collect premiums for a time period that has already passed,” but the practice seems to be commonplace in the world of force-placed insurance. As is the existence of extremely cozy relationships between insurer and servicer:

The case got stranger when Golant’s client visited the address listed for the insurer in an unsuccessful attempt to sort things out, he said. While the people there claimed to represent the servicer, they were operating out of an office belonging to a force-placed policy insurer since acquired by QBE Insurance Group.

Golant didn’t understand why the insurer would be speaking on behalf of the servicer. But shortly after he began asking questions about the relationship between servicer and insurer, the case settled. Confidentially. At the insurer’s request…

According to both Assurant’s SEC filings and the marketing materials of a subsidiary of rival QBE Insurance Group, the insurers don’t just write policies on request — they also enter into long-term agreements to detect uninsured properties in their clients’ servicing portfolios and perform other back-office functions. It was precisely such an arrangement that Golant’s first client ran into when she tried to visit her servicer, he says — the insurance company employees had taken over the servicer’s role.

Horwitz has found one case where an $80,000 property was being insured for $10,000 a year, and also notes that at Assurant, “the unit handling force-placed insurance has accounted for $811 million of its $879 million in profits during the last two years.”

The good news here is that there’s a specific provision in the Dodd-Frank act requiring that force-placed insurance be “bona fide and reasonable”. The bad news is that it’s far from clear who is in a position to enforce that particular law. And in the meantime, loan servicers would seem to have every incentive to drag out delinquencies as long as possible, if doing so means they get massive insurance revenues. Or the kickbacks associated with them.”

These guys never met a scam they didn’t love . . .

>

Source:
Losses from Force-Placed Insurance Are Beginning to Rankle Investors
Jeff Horwitz
American Banker | Wednesday, November 10, 2010
http://www.americanbanker.com/issues/175_216/losses-from-forced-place-insurance-1028475-1.html

The force-placed insurance scandal
Felix Salmon
Reuters Nov 9, 2010 17:31 EST
http://blogs.reuters.com/felix-salmon/2010/11/09/the-force-placed-insurance-scandal/

Category: Foreclosures, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “Latest Mortgage Scandal: Force-Placed Insurance”

  1. wally says:

    Is there any process or institution left in this country that does not stink to high heaven?

  2. xynz says:

    This is all the fault of Fannie Mae, Freddie Mac, the CRA and water fluoridation.

  3. Rescission says:

    Would like to know how many cases there are like the one you highlighted. Is this a one-off?
    Forced placed insurance has always been in mortgage documents and is necessary when homeowners let their policies lapse. Escrowing was also created to protect the lender from this happening. Of course it makes sense in theory AND in practice. I would think, however, that if an escrow agent allows the insurance to lapse, and the borrower has paid their escrow payments, the borrower should have a claim against the escrow agent or servicer.

  4. “Breach of Fiduciary Responsibility.”

    ~~

    Memo to: “Bag” Holder, putative U.S. AG

    You ******* Blow.

  5. NiNM says:

    Stunning. Has a single person been penalized for the last batch of scams … other than being asked to work for the federal gov’t?

    I have a plain vanilla mortgage with Bank of America that seems to get more ridiculous as time goes by — highlights being that they have “forgotten” to pay my property taxes three times now and they have not very helpfully decided to no longer send paper statements or electronic reminders, so I have to remember to pay online, on time (only one payment can be scheduled at a time, too).

  6. bergsten says:

    @NiNM — here’s another BofA Booby Trap to watch out for. If you pay a BofA loan with your BofA online account the money transfers instantaneously and cannot be reversed.

    Meaning, you have NO chance to correct any inputting error, say, adding an extra zero or two.

  7. Adam says:

    Mr. Ritholtz,

    I’ve tried to voice this gripe in many venues, may it have an audience here. There are similar tactics practiced in the student loan industry, and for those of my generation (I’m 27), we owe a mortgage size monthly payment for our education. We cannot declare bankruptcy, we cannot renegotiate principal, and when we default, there is no sale of collateral that settles the debt. We end up owing more money in collection fees and higher interest rates.

    I ended up digging into the nitty-gritty in the records on one of my private loans taken out with Sallie Mae about a year ago, and found some disturbing figures that I feel had never been properly disclosed to me. My minimum monthly payment is $50/month, of which, approximately $10 each month goes to principal. I looked at my full account history on Sallie Mae’s website to see how much I had paid each month, so that I could reconcile total interest paid for my student loan interest income tax deduction and found that I had been charged a $122 fee for default insurance on my own account.

    Investor’s did not pay this premium, I paid this premium. It was tacked on to the balance that I owe. At $10/month principal repayment, I paid $120 in principal down that year, but then $122 was added back to the principal that I owed. I gained no ground that year. Investors likely laughed, Sallie Mae laughed. I was pissed. Insurance? For what? Insurance against me defaulting on my student loan? That is what I was told. If the investors paid the premium, I would believe it. They would have been the one hedging the risk of my default. With me paying the “insurance” premium, and the minimum payment every month (one that Sallie Mae “ensured” me that would pay off the debt in full in a fixed number of payments), I basically committed myself to being in debt to Sallie Mae perpetually.

    Was this ever disclosed to me in a repayment plan? No. Was I ever formally told that an insurance premium was being charged to my account? No. If I made the scheduled payment every month, would I ever pay off this student loan? No. Are student loans revolving loans? No. Then why are they allowed to operate as such? I don’t know. I now pay $60-$100 per month on this loan, depending on my cash available. It’s the only recourse that I believe I have: to just shut up and take it. I think there are many others out there that feel the same way. I’m one of the lucky ones that still has a job, and can make this payment. I identify with those that can’t. I’m pissed, those that aren’t so lucky are disillusioned, if not depressed.

    Welcome to feudalism. Somebody help us.

  8. Lyle says:

    Posted to wrong topic oops.

    One way to avoid this if the company is slow is to pay yourself and then you will get a refund one way or the other. Back in the late 80s and early 90s the mortgage company I had would not pay for a couple months after the policy was due, so I paid the premium myself. Then I would get a check from the insurance company when the mortgage company finally paid.
    I finally just paid the mortgage off at the 15 year point to stop this game. I was amazed the insurance company was willing to trust the mortgage company so much more than they were willing to trust consumers, i.e. the policy did not get canceled at 2 months past due.

  9. fraud guy says:

    Or if they feel that you haven’t paid insurance (even if you have), they will charge you $3200 for an insurance policy that has the same coverage as the $600 annual coverage directly through the insurer.

  10. Lyle says:

    Re fraud guy, then be sure you keep the receipt. Also never hurts to know a lawyer to write letters.

  11. Arequipa01 says:

    In the 2004 election cycle, the monster people call Bush campaigned on creating an ‘ownership society’. It was a signal.
    My great, great grandfather came from Ireland in 1845 as an indentured servant and worked for a merchant in upstate New York. After seven years the debt incurred to pay his passage was cleared. Unlike those brought in bondage from Africa, he at least had the possibility of an unencumbered future. People must remember that there is a stratum of this population that descended from slave owners. They are unreconstructed monsters. They love theft, and pillage, and cruelty. They work toward re-enslaving a swath of the population in this country. Yeah, I know…’don’t be hysterical’.

    As for Adam above, “Welcome to feudalism. Somebody help us.”

    1. Recognition of the state of affairs, positive.
    2. Looking to others for help, not so much (I say this as a bleeding heart Fabian Socialist intent on soaking your children in large vats of sodium fluoride so I can mind control them and make them watch Phineas and Ferb…). Point being, it is better that we generate the solution to our problems rather than rely on outside forces, in particular, the US Fed Govt which has gone so rogue that recovery is impossible.

  12. Arequipa01 says:

    In the 2004 election cycle, the monster people call Bush campaigned on creating an ‘ownership society’. It was a signal.
    My great, great grandfather came from Ireland in 1845 as an indentured servant and worked for a merchant in upstate New York. After seven years the debt incurred to pay his passage was cleared. Unlike those brought in bondage from Africa, he at least had the possibility of an unencumbered future. People must remember that there is a stratum of this population that descended from slave owners. They are unreconstructed monsters. They love theft, and pillage, and cruelty. They work toward re-enslaving a swath of the population in this country. Yeah, I know…’don’t be hysterical’.

    As for Adam above, “Welcome to feudalism. Somebody help us.”

    1. Recognition of the state of affairs, positive.
    2. Looking to others for help, not so much (I say this as a bleeding heart F_abian S_ocial_ist intent on soaking your children in large vats of sodium fluoride so I can mind control them and make them watch Phineas and Ferb…). Point being, it is better that we generate the solution to our problems rather than rely on outside forces, in particular, the US Fed Govt which has gone so rogue that recovery is impossible.

  13. machinehead says:

    Something to keep in mind is that many insurers now use the insured’s credit rating as part of their underwriting and premium calculation process.

    So an insured homeowner who’s in financial trouble may face escalating homeowners insurance premiums (along with escalating property taxes), just when she’s least able to pay them.

    These days, the US financial system is full of tripwires to induce cascading failures for individuals. Screw up on just one payment, cross default clauses come into play, and your whole financial life falls apart like a chain of dominoes going down.

    This is one ugly, wart-faced, bankster-controlled system.

  14. Greg0658 says:

    with all the news coming at us from every corner in this 21st century …
    I’m starting to wonder if you-alls wet-wear is wondering if there is another way ..
    ie: another way other than this standard capitalism .. or whatever ‘ism we are in
    .. to live in peace and harmoney for many more centuries to come

    ps – the inventions of this modern world .. seemingly uncontrollable in a dollars 1st people 2nd world … we must be spending more to …. people will always find a way to survive – its in our DNA .. why create a system that requires dirty deeds to survive .. its got to be cheaper to provide for a minimum common welfare than to prosecute and house (or not able to prosecute ie: complexity) in a private profits public losses structure

    pss – as a race . us humans have got it all . now we gotta keep it

  15. Thatguy says:

    “These guys never met a scam they didn’t love . . .”
    I know the question has been asked before, but how can anyone trust the financial markets enough to “invest” their money there if they are being run by unrepentant fraudsters and scammers?

    And Bergsten:
    WTF are you doing still banking with BofA then? My god, I would’ve thought someone who knew what was going on would have gotten their money the F out of those criminal institutions.

  16. Mannwich says:

    @wally: Go see the movie “Inside Job” and you’ll get your answer. About the corruption that’s taking place on Wall Street, government and academia that’s allow all of this to keep happening. Everyone getting paid off to see nothing wrong with what they and others are doing to their fellow man and this country.

  17. Mannwich says:

    I think the new term for our economic system is “fraudalism”.

  18. saintshawn29 says:

    Awhile back I worked @ a mid-sized community bank and was responsible for force placed insurance…and in my experiences, the only borrowers who needed it placed were the deadbeats who wouldn’t call us back for the life of it. Once again, mass media has taken a FEW instances where banks messed up, and make it BLOGWORTHY :) I’m guessing BR is vying for another CNBC prime time spot discussing…force place insurance, man I hope I dont miss it! lol
    If I am a borrower and I got my monthly bill with that months FPI included, which it is, and it was ~$3,000 more that months prior…??? It would take an idiot to not notice

    Quit making non-issues an issue.

  19. b_thunder says:

    “These guys never met a scam they didn’t love . . .” – they don’t award MBA’s in Financial engineering for nothing, you know….
    “Greed is good” is so 1980s… Lie, cheat, steal, and make you clients your victims is so 2000s

  20. Darkness says:

    saintshawn29, you didn’t actually read the article, did you? $811 million out of $879 million in profits is not a few instances, it’s endemic.

    As pathetic as the pace of reform was the last two years, it’s going to go to zero over the next two. Fortunately, two years goes by fast. For Republicans though, after one of the zombie TBTF go under, it will seem quite slow. Hopefully.

  21. Mannwich says:

    @Darkness: Well, in fairness to saintshawn29, after what we’ve seen $811 million might not seem like a large amount of money anymore. Anything without a “b” next to it seems like a mere pittance now.

  22. gordo365 says:

    The life lesson from all of this – DON”T BORROW MONEY – unless the leverage enables an investment that pays positive cashflow.

    - don’t let your kids exit college with debt.
    - teach them to save for things they want and pay cash.
    - live beneath you means and don’t get beholden to anyone.

    Has the consumption of 1000s of TV commercials collectively convinced us that owning money to a bank is better than owing money to a loan shark or being an indentured servant (like Arequipa01′s great grandfather)? It isn’t.

    Watch this SNL skit every month when you sit down to pay your bills.

    http://www.hulu.com/watch/1389/saturday-night-live-dont-buy-stuff

  23. olenodies says:

    Bank of America tried pulling a variation of this scam on my last winter. They claimed my insurance policy had lapsed which it hadn’t and tried to place me with one that cost 5 times as much. I spent 2 hours on the phone to get it straightened out.

  24. [...] forced-place insurance scandal picks up another victim, investors.  (Big Picture, Felix Salmon, Aleph [...]

  25. saintshawn29 says:

    Life lesson #2…Vertical Integration minus Regulation equals **** loads of profit!

    https://www.everbank.com/about/history.aspx

  26. Mannwich says:

    Why is ANYONE still banking with BofA at this point?

  27. ToNYC says:

    It won’t change, until you do. If opt out you must, you must. Don’t like junk food or labor-arbitraged crap? Don’t reach in your pocket and buy it. Malcolm X had it right and they quickly corrected him for advocating avoiding Whitey stores in their neighborhood and setting up their own distribution to keep the money in the community.

  28. bergsten says:

    @Manny (2:46) “Why does anyone still bank with BofA”?

    For the same reason they listen to Howard Stern.

    To see what they do next.

  29. bergsten says:

    And, because, sadly, the rest are as bad or worse.

    I’m telling ‘ya, I’m startin’ my own bank.

  30. Margery Golant says:

    It’s a bit hard to follow this discussion, so I hesitate to inject myself. My son and I were the source of much of the material for the Nov. 10 American Banker story and have through cases we have been involved in become quite familiar with a number of the models and details of “partnerships” in use between force-placed insurers and servicers, including such things as loss ratio bonuses which do in fact incentivize servicers to reduce claims, reinsurance JVs, servicer-owned insurance “agencies” who receive substantial ‘commissions’ for preordained insurance written as a result of these partnerships, insurers as “outsourcers” of the servicer’s back office ‘insurance department’, and of course, the ‘in your face’ conflict relating to the BoA-Balboa situation.

    I read the Felix Salmon piece. He has his facts somewhat confused – it was not MY mortgage my son was trying to sort out. He and I were working on a case for a CLIENT of mine, wherein the servicer purported to “retroactively” force place hazard, flood and windstorm policies for a 9 month period when it was easily documentable had been no windstorms, and where the client HAD her own insurance as to two of those policies, one continuously, one almost continuously, and the third had been cancelled by an error made by the agent.

    The $80,000 property insured for $10,000 a year is a client of mine as well. The Balboa-insured, BoA / Countrywide serviced Florida homeowner who had to SUE Balboa to pay to remediate the hurricane damage to her home, even though its post-storm condition was seriously inconsistent with the Countrywide investors’ interest is likewise one of ours.

  31. royblizzard says:

    My wife and I found a chink in their armour and just got back our first check against the forced placed insurance of Assurant aka Longhorn General Agency aka Standard Guarantee. If you want to know how to beat these skunks at their own game go to our facebook page Homeowners Against Mortgage Servicing Fraud and join and we will tell you how to get your money back, all of it! without an attorney. It is a bit complicated, but well worth the effort. Let’s put these skunks out of business.

    Facebook: Homeowners Against Mortgage Servicing Fraud