Fannie & Freddie have finally begun to investigate the self-dealing and often fraudulent practice of Force-Placed Insurance. Both the New York State Insurance Regulator and the Consumer Financial Protection Bureau have been way ahead of the GSEs on this.

For those of you who may be unfamiliar with Force-Placed Insurance, it is an optional bank insurance product that sometimes gets forcibly jammed down the throats of home owners and mortgage investors at grossly inflated prices. As Jeff Horowitz detailed in 2010 (Losses from Force-Placed Insurance Are Beginning to Rankle Investors), most of the fees, commissions and revenues from this “product” went straight back to the banks holding the related mortgage, typically to wholly owned subsidiaries.

It was an abusive practice, and in quite a few instances, the additional costs actually tipped homeowners into foreclosure.

Here’s the WSJ:

“The Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) plans to file a notice Tuesday to ban lucrative fees and commissions paid by insurers to banks on so-called force-placed insurance . . .

Forced policies have boomed in the wake of the housing bust, as many homeowners struggled to keep up with mortgage payments. Some borrowers may try to save money by dropping the original standard coverage, only to be hit by policies with premiums that are typically at least twice as expensive as voluntary insurance, and sometimes cost as much as 10 times more. Nearly six million such policies have been written since 2009, insurance industry data indicate. Consumers are free at any point to replace a force-placed policy with one of their own choosing.”

The Consumer Financial Protection Bureau has issued new rules on this, but the real action seems to be the variety of civil suits from investors; additionally, New York State just reached a settlement with forced-placed insurer Assurant, including a $14 million penalty, and a long list of practice changes (after the jump). If it were up to me, I would have insisted on profit disgorgement and jail time for the CEO (But I am “unreasonable”).

Hopefully, this is the first of many . . .

 

 

Previously:
Latest Mortgage Scandal: Force-Placed Insurance (November 10th, 2010)

Rule of Law: Banker Criminality Demands Prosecution (May 20th, 2011)

A modern Pecora Commission could right Wall Street wrongs (February 5th, 2012)

Sources:
U.S. Cracks Down on ‘Forced’ Insurance
ALAN ZIBEL And LESLIE SCISM
WSJ, March 25, 2013
http://online.wsj.com/article/SB10001424127887323466204578382603826452198.html

Losses from Force-Placed Insurance Are Beginning to Rankle Investors
Jeff Horwitz
Amaerican Banker, NOV 9, 2010
http://www.americanbanker.com/issues/175_216/losses-from-forced-place-insurance-1028475-1.html

 

The key terms of the settlement include:

► Assurant shall file with DFS a premium rate with a permissible loss ratio of 62 percent, supported by the required data and actuarial analysis that is acceptable both professionally and to DFS. This will substantially reduce homeowners’ premiums.

► Every three years, Assurant will be required to re-file its rates with DFS for review.

► If Assurant’s actual rates in any year result in an actual loss ratio of less than 40 percent for the immediately preceding calendar year, Assurant will be required to re-file its rates for the next year for DFS review in order to bring the loss ratio back up.

► Assurant must report annually to DFS on its actual loss ratio, earned premiums, itemized expenses, losses, and reserves.

To put a stop to the improper and unfair practices found in DFS’s investigation, many of which helped Assurant support inflated premiums:

► Assurant shall not issue force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with Assurant.

► Assurant shall not pay commissions to a bank or servicer or a person or entity affiliated with a bank or servicer on force-placed insurance policies obtained by the servicer.

► Assurant shall not reinsure force-placed insurance policies with a person or entity affiliated with the servicer that obtained the policies.

► Assurant shall not pay contingent commissions based on underwriting profitability or loss ratios.

► Assurant shall not provide free or below-cost, outsourced services to servicers or their affiliates.

► Assurant shall not make any payments, including but not limited to the payment of expenses, to servicers, lenders, or their affiliates in connection with securing business.
To provide restitution to those who were harmed by Assurant’s practices:

► Refunds will be provided to consumers through a claims process and a third-party administrator selected by DFS and paid for by Assurant for homeowners who have been force-placed at any time after January 1, 2008 and meet the eligibility criteria for one of the following three categories of claimants:

► Homeowners who defaulted on their mortgage or were foreclosed because of force placement.

► Homeowners who were charged for force placement at a coverage limit higher than permitted by their mortgage.

► Homeowner’s who were erroneously charged for force-placed insurance: either because they had voluntary insurance in effect, or they were charged commercial rates for a residence.

-Mortgage Professional

 

Category: Bailouts, Crony Capitalists, Foreclosures, Legal, Real Estate, Really, really bad calls

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.

5 Responses to “GSE Investigation Into Force-Placed Insurance (finally)”

  1. rd says:

    Good news! Apparently homeowners are now requalifying for HELOCs.

    That should look after that whole deleveraging problem and refuel the American consumer (at least until he retires with no savings).

  2. Jim67545 says:

    Another dirty little nook of the banking system. If there is payback of premiums to the bank it should be harshly dealt with since it potentially adds to investor losses at the benefit of the servicer.

    My experience is that insurers (not affiliated) charge WAY more than conventional homeowners for severely limited coverage. They claim that risks are higher. They do not inspect the property, base premiums on square footage (etc.), and they do take insureds regardless of credit score and that people not buying their own insurance usually defer require maintenance and even damage homes. This may all be true but what impact it has on payouts is undisclosed and whether it justifies higher premiums is unknown. This was true when I shopped around this very limited insurance market.

    Perhaps more of a problem is a servicing one. Banks do not seem to comprehend that piling extra insurance premiums on the loan (it is “paid” by increasing the loan’s principle balance), when the property is foreclosed (the fate of many of these) the insurance cost only adds to the size of the lenders’ loss. So, who ends up paying for it? Usually the lender or, with GSE loans, the investor (hence the GSE’s concern.) Often the servicing with respect to insurance tracking is taken over by the force place insurer. Of course, they place that insurance swiftly when they think justified and are sticky about cancelling it.

    The answer (in the bank where I ran lending) was to aggressively and completely disclose to the homeowners their default (at the time there were no requirements for notification and may still be true), the added cost and that coverage is limited to the outstanding balance on the loan and only insures the premises. No contents. No liability.

    Then, engage on a program of phoning the customer to understand the problem or correct misinformation. If the homeowner has allowed their insurance to lapse, force place as a stopgap but then advance money on the loan one time so they can buy conventional homeowner’s insurance and require a monthly escrow to pay for it in the future. This is permitted in the GSE notes. In a majority of cases this keeps them in compliance once they no longer are faced with a big annual insurance payment.

    Some, perhaps many banks put force place insurance in place and forget about it. The homeowner thinks things are “solved” and the bank somehow is magically paying for insurance and the higher premiums just pile up.

  3. Fred C Dobbs says:

    The politically-approved practice of forcing or duping borrowers into buying insurance from wholly-owned subsidiaries of bank-holding companies, especially at poor prices, is another example of foolish, unwise legislation. In the ’30s, bank holding companies were banned, and without subsidiaries, lenders could only require the borrower to buy from a high-quality insurer, such as a AAA-ranked insurance company. In the late ’60s, Congress, in its infinite wisdom and infallibility, politically-approved the formation of the first bank-holding company: The Bank of America. Now, Banks could extract every last cent from the sale of a residence: interest and points on loan, premiums on disability, income-interruption or credit (insurance against the possible future inability to pay the mortgage), on fire, flood, casuality, vandalism, and malicious mischief,(insurance against damage or loss of the security residence), and, sometimes, premiums on title insurance, and the real estate broker fee. One argument in favor was it would be cheaper, which meant that everyone previously involved as broker etc. made less and suffered a loss in their standard of living. The result was a destruction in competition, lowered quality product and service everywhere, and more centralized control over another area of our economy. Congress and its minions: civil servants in D.C. obviously like to control and centralize everything they can get their hands on. Witness the fact that the only long-term growth industry the past 50 years is government. It is only natural because the three branches are headquartered there. But has it been good? Is it good, in the Age of Drones? Concentration of power leads to abuse, as we have seen. Isn’t about time, Wall Street sees the danger it presents to Wall Street? Wall Street may be the last to go, but, as investors and depositors in Cyprus find, they are the fools at the poker table. Might makes right, and force not reason is the source of law, some say. With all of its money and power, why doesn’t Wall Street rein in the politicians who ignore tomorrow and make laws to line their pockets today. Why does Bloomberg screw with what people drink, smoke, and eat, when he could use his power to force legislatures to compel the government executives to run their operations efficiently, without extravagant waste and gross over-compensation? As Wall Street gets tighter and tighter with Congress they come closer and closer to being taken over, e.g. Cyprus, Nazi Germany. As Media continues to serve as the non-critical lapdog of Congress etc. and lose their independence they become weaker and weaker, and turning it into the Pravda of the Cold-War becomes easier and easier. For the benefit of themselves, and everyone who isn’t on the government payroll, in other words, those citizens who work to pay the wages and salaries of government employees, will Wall Street please stand up against the rampant stupidity? Let’s hope so.

  4. AHodge says:

    FHA staff are actually looking at my scam case where B of A charged me $7000 force place for flood insurance i already had

    when i wont pay
    they have threatened forclosure, lawyers letters etc wrecked my credit rating
    and then
    laughably
    have given me a loan mod.
    you cant make this stuff up

    but now its awesome
    DeMarcos staff listened
    asked for evidence and documentation
    with any luck i may help nail the bastards

    and now has an inch worth of documents

  5. Frilton Miedman says:

    Kinda makes me want to tune in to Fox and listen to a brain dead rant on how regulations hurt the economy.