FORCE-PLACED insurance. Most homeowners never hear about it until their mortgage lender sends them a letter saying that they must have flood or some other kind of insurance and that if they don’t act quickly, the lender will buy it for them — at a price, it turns out, that is almost always much higher than the market rate.
I was one of those homeowners, and I wrote a column last year about how difficult it was to get this type of insurance removed. I was reminded of that column when I read a colleague’s article about New York State investigating banks for making homeowners buy this overpriced insurance.
While lenders have every right to make sure that the homes on which they hold mortgages are adequately insured, borrowers have complained about the exponentially higher rates and how difficult it is to have the charges removed. When homeowners do not pay the charges or show proof of their own insurance, the penalties mount quickly. While there are no numbers on how many force-placed insurance policies have been put into effect, experts say they believe that the practice has become more common in the last couple of years.
One of the practices that has gotten regulators’ attention has been the mortgage lenders’ use of insurance subsidiaries to buy the force-placed coverage. But even when the lenders’ subsidiaries are not used, the way this insurance is applied has still irritated homeowners.
The mortgage industry argues that the insurance is more costly because it is being bought by the insurance companies that underwrite these policies, and that those companies have no knowledge of the homeowner’s credit score, which affects the cost. The lenders also say the practice is necessary to protect their shareholders’ interests.
“The objective here is to protect the interest of the lender,” said Vik Jain, managing director of Wingspan Insurance Services, which alerts banks when insurance lapses on the mortgages it monitors. “The only way to do that is to force-place that coverage. The lender cannot just call State Farm and renew the policy.”
That is certainly true. But banks often outsource this work to vendors that don’t always communicate with each other. While his company tracks loans and alerts the banks, Mr. Jain said, other servicing companies notify the customers that they do not have insurance and actually buy the insurance for the property. Since these servicing companies profit from the sale of the insurance, they are the ones that lose money if homeowners succeed in having the force-placed insurance removed from their accounts.
While there are at least a half-dozen pending class-action suits against banks over force-placed insurance practices, relief for consumers is slow in coming and is unlikely to cover all the charges homeowners have incurred.
Kai Richter, a lawyer at Nichols Kaster, an employment and consumer rights law firm in Minneapolis, said his firm recently won a $9.65 million class-action suit, Hofstetter v. Chase Home Finance. In that case, Chase had to stop both taking commissions from selling force-placed insurance and requiring insurance above the loan balances. But the only customers who won relief were the 40,000 who were part of the suit, and even then, Mr. Richter said, the award was only enough to refund about two-thirds of their money.
Suits like this may prevail and states like New York may succeed in wringing more concessions from banks. But such resolutions take time. What are homeowners doing today as they battle banks’ force-placed insurance, and what should you do if you find yourself in a similar situation?
PAY UP The sad truth is that most homeowners will give up before they win a battle against a bank, particularly one that holds the mortgage on their home. Homeowners are at a disadvantage, even if they believe they are right.
“When you fight the mortgage company, the mortgage company is going to hold all the cards,” said Keith Crocker, professor of insurance and risk management at Pennsylvania State University who won his own battle over force-placed insurance against Wells Fargo. “If they say you need it, you’ve got to go get it so they don’t force-place with even more expensive coverage. Then you fight them on it.”
If this seems to be capitulating, it is. But doing so saves time and may prevent you from falling into the labyrinth of unanswered messages, lost paperwork and mounting fees.
DON’T IGNORE IT The initial letters from many banks about the need for insurance are computer-generated and easy to ignore. Homeowners may think they already have the coverage or do not need what is suggested. That may be true, but not making that clear to the bank has serious ramifications.
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