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Forced placed insurance is a mechanism by which the banks can force people into foreclosure based on collusive action between the insurer and the bank. If that happens then they have unilaterally changed the APR and breached the contract. Demanding the payment and declaring a default based upon a false declaration of insurance failure or a false declaration of the cost of force-placed insurance could invalidate the note of default, the foreclosure, the sale and the eviction.
Sound crazy? That is because it is crazy, but nonetheless quite true. It has led to numerous civil prosecutions in various states where “lenders” have agreed to to reinstate loans improperly declared in default and in which the “lenders” paid tens of millions of dollars in fines and refunds. The bottom line is that they will do anything to get homes into foreclosure or to use the failure to pay insurance as a reason for declining a modification. It is a clear opening for borrowers to attack everything from soup to nuts because if the “lender” is demanding the wrong amount of money it not only invalidates the notice of default, the foreclosure and the sale, it also violates the homeowners’ redemption rights.
The key to unlocking this particular version of bank fraud is to put pen to paper. Figure out the (make a call) how much the premium should be on say a home that was mortgaged for $700,000. Then ask for the premium if the insurance was only $200,000. Anybody who reads this blog will know instantly that the amount of the insurance premium is going to be less when the insurer accepts a $200,000 risk instead of a $700,000 risk.
Here is where the sleight of hand comes in. We know that the insurance carrier is not going to pay more than the replacement value or fair market value of the house which ever is less (or more depending on the policy).
When the Bank “buys” insurance under force-placed insurance, it is “buying” a policy for a stated risk of $700,000, which is the amount of their loan. But both the bank and the insurance company know that the real risk has declined to $200,000.
The premium charged is for the $700,000 policy even though the product sold (risk assumed by insurance) is only $200,000. THEN the bank puts a surcharge based upon the premium “paid” for the $700,000 policy.
But did they really pay for the $700,000? No, they split it up with the broker, the carrier and their own service department at the expense of the borrower who if they do reinstate is being price gouged and if they can’t pay the overcharge, they face foreclosure.
The insurance policy the borrower purchases is intended to cover the replacement cost of the house, not the mortgage. When the borrower misses a payment or fails to keep up the insurance the bank create a situation in which forced placed insurance is imposed at a multiple of the regular premium.
But it goes further than that. the original insurance premium was based upon a value placed on the house by the appraiser and which the bank used to find the initial loan.
Before the current era of mortgage madness, the likelihood that the house would be worth less at the time of foreclosure than the time of purchase was extremely low. The issue which I am discussing is not one which applies to the old mortgages, although the insurance premium included a surcharge that was force-placed placed and those could be considered unconscionable simply based upon the fact that the premium imposed by the bank was much higher than the premium which would have been charged directly by the insurer to the borrower.
In the current situation we have an entirely different set of facts which definitely creates an affect on the unconscionability of the insurance charge to the borrower or in force-placed placed insurance. where the replacement value of the home has declined substantially, the amount of insurance which the insurance carrier would carry as a risk is limited to the amount that would be required to replace a home.
This should result in a decrease in the premium at a time when the property was originally insured add a much higher value. Let’s take a case where the property was originally appraised at nine hundred thousand dollars and the price for the purchase of the property was $850,000 and we assume that the buyer put hey down payment of $150,000, the amount of insurance value for the bank was the amount of the mortgage which is $700,000.
At that point the insurance carrier has not done anything to verify the replacement value of the property. They are simply taking the closing documents as a representation of the fair market value of the property. But their liability is limited to the replacement value of the home.
If the fair market value of the property has declined to $200,000 and if we take that figure as the replacement cost of the home and the event of a total loss we can assume that the carrier will only cover the replacement value or $200,000.
The premium for a home insurance policy in which the risk assumed by the insurance company is $200,000 would result in a much lower premium than the premium that was originally charged when the insurer was taking on a risk of $700,000.
Since it is clear that both the insurer and the bank both know that the premium being charged to the borrower is for the $700,000 policy while the actual insurance is limited to a risk of loss of $200,000 an assessment of a premium based upon the $700,000 figure would be an overpayment, unconscionable, and probably in breach of contract as well as collusive in defrauding the borrower.
Adding the surcharge imposed by the bank for force-place insurance based on the premium for a $700,000 policy results in an insurance payment that is many times the actual amount of the premium that would be charged by the insurer to the borrower or the “bank.”
The insurer would simply pay the replacement value in the event of a total loss even know it had received a premium based upon a $700,000 value. The surcharge imposed by the bank for force-placed insurance would be based upon the premium for the $700,000 policy which we have just seen is fabricated. therefore using force placed insurance as an excuse for foreclosure leads to various defenses.
A similar situation arises in the case of title insurance. title: carriers will routinely deny coverage for any corruption of title caused by claims the resulting from supposed land transactions in which the loan was sold or securitized. A subpoena issued to the title insurance carrier would reveal that the reason they would deny coverage is that the chain of title was corrupted from the beginning and therefore misrepresented which induced the carrier to accept a risk of loss which was not was in the four corners of the insurance contract.
It’s by going after the nickles and dimes that things pile up and reveal wholesale fraud. Don’t take my word for it —figure it out for yourself. Nearly all force-placed induced foreclosures were the product of fraud and collusion and that is what states around the country are prosecuting, passing new regulations, and passing new laws. The refund is subject to contingency fees for the lawyer — another open can of worms with deep pockets and weak defenses.
By EDWARD WYATT
A widespread practice by lenders of buying often-costly insurance for mortgaged property and billing the owner is under scrutiny.