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Start with some premises that were speculation but are now known to be true. First, banks and servicers need as many properties in foreclosure as possible. There are many reasons. The banks want it because it covers up the outright bold lies they told investors to get them to “buy” non-existent mortgage bonds most of which involved either no paper certificate at all or they were simply not worth the paper they were written on. Second, the bankers (management) could make a killing depressing Market prices and then relieving the pressure when they wanted prices to go up. Third, servicers make far more money in fees as long as they are “servicing” a loan in default because their fees are higher on loans in distress. Fourth in many cases the servicers actually get to “own” the property if the foreclosure sale occurs.
The tactic used now is that if you miss a mortgage payment or even if you don’t, the servicer can say they were required to obtain insurance on their own because you didn’t. This is forced place insurance and nearly all of it is a bold-faced lie. Now the servicer adds to your mortgage payment the cost of forced place insurance even if they paid nothing. If you are on the edge, the cost of forced placed insurance (many times 3-4 times normal rates) is the straw that breaks the camel’s back. The result? Many homes that were otherwise current in their payments end up in foreclosure.
This can be stopped. On challenge, most servicers back off of forced place insurance claims, but getting them to stop the foreclosure is more difficult — usually because by the time the homeowner challenges the forced place insurance some scheduled payments have been missed. But upon further challenge it can usually be shown that the scheduled payments were in fact made by the servicer to the creditor, meaning that the declaration of a default and notice of sale were bogus — just like everything else in this mess.
Servicers incentivized to bet against homeowners, may hurt housing
by Tara Steele
Insurance policies are not often pointed to as the problem with housing, but one news outlet says homeowners are being pushed off of the foreclosure cliff by force-place insurance.
Force-placed insurance’s impact on housing
“Force-placed” insurance, or property insurance the bank takes out for homeowners who miss an insurance payment has recently come under fire by Bloomberg News Editors1 who say the policies cover less and cost more, and will likely end up putting homeowners into foreclosure regardless of the force-placed insurance policies.
Deeper analysis of the forced-place policies revealed that the loss ratio is much lower than expected, in other words, the percentage of premiums paid out on claims is severely low, paying out $0.20 cents on the dollar, when the average $0.55 cents on the dollar payout of most other types of policies. The implication is that the insurance companies are charging extremely high premiums, and when the policies actually pay out, they barely cover the bank’s losses.
Bloomberg reports that banks not only receive commissions on the forced-place policies, they make even more money by re-insuring them, so the bank takes out a policy to protect the property but is making a more lucrative bet that the policy will never pay out. Fannie Mae has already instructed servicers of Fannie-backed loans to reduce the cost of insurance premiums, but Bloomberg implies that these directives are weak and more can be done.
Although the Consumer Financial Protection Bureau is looking into forced-place insurance, Bloomberg urges the CFPB to require all servicers to pick up the homeowner’s lapsed policy when possible, otherwise seek bids for lower cost options, and notes that Freddie mac should demand its servicers to get competitive bids on insurance policies.
The crux of the forced issue
The CFPB should investigate the commissions made by banks on these policies, says Bloomberg, as they are a major incentive to put homeowners into policies they cannot possibly afford. “Many homeowners who experience coverage gaps have severe financial problems that lead them to stop paying their insurance bills,” notes Bloomberg. “They are already at great risk of foreclosure. Banks and insurers shouldn’t be allowed to add to the likelihood of default by artificially inflating the cost of insurance.”
Filed under: foreclosure Tagged: | Bloomberg News Editors, borrower, CFPB, Consumer Financial Protection Bureau, declaration of default, Fannie MAe, Force Placed Insurance, foreclosure, foreclosure fraud, fraud, housing insurance, housing market, insurance premiums, investors, mortgage bonds, no paper certificate, non-existant mortgage bonds, Notice of Sale, predatory lending, servicers betting against homeowners, Tara Steele