Thursday, November 11, 2010

Latest Mortgage Scandal: Force-Placed Insurance

From The Big Picture.

American Banker’s Jeff Horwitz has a spectacular piece of reporting today about goings on in an obscure corner of the mortgage-servicing world: Losses from Force-Placed Insurance Are Beginning to Rankle Investors.

What is force-placed insurance? If any homeowner fails to keep up their insurance premiums, then their loan servicer can step in to buy a comparable insurance policy (theoretically on the loan holder’s behalf), to ensure the mortgaged property remains fully insured.

It’s sensible in theory, but in practice, it’s ripe for abuse. 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.


Related article: Losses from Force-Placed Insurance Are Beginning to Rankle Investors