Monday, February 02, 2015

Guest Post: The Force(d) is with You

From time to time, we host guest posts from esteemed colleagues and other bloggers. These are typically for insurance-related matters that fall outside our own particular wheelhouse. Today, we're pleased to bring you this post from Dennis Wall,  an elected member of the American Law Institute, author of several legal and risk-related books, and proprietor of the Insurance Claims And Issues blog.

If you've ever bought a house, you know that the lender requires you to insure it. Sometimes, folks let their coverage lapse, and the lender then obtains its own coverage, "forcing" it onto the property (and the homeowner). Today, Dennis explains the implications in this economy:

The “Great Recession” of 2008-2009 has caused a lot of harm. No harm has been felt more keenly than by people involved with residential mortgages and home loans.

During the six years leading up to the Great Recession, or from 2002-2007, mortgage debt rose nearly as much as it had since the United States was founded. Household mortgage debt rose an average of $60,000.00 during those same six years, or about $10,000.00 each year for each home in the United States. That is also the time when the once-standard 30-year fixed rate mortgage with a 20% down payment was no longer the mortgage loan of choice. [Findings from report of the Financial Crisis Inquiry Commission. THE FINANCIAL CRISIS INQUIRY COMMISSION FINAL REPORT, January, 2011].

A forensic investigation over three years, including research into publicly available federal court electronic filings, reveals clearly that many business practices have deliberately been kept secret concerning the sale, maintenance and monitoring of mortgages. In particular, the practices of a small number of insurance companies offering force-placed insurance to lenders has dramatically driven up the price of lender force-placed insurance or LFPI.

LFPI is insurance which protects the lender’s interest in the borrower’s collateral. It is “collateral protection insurance” in the sense that it is insurance which protects only the collateral.

Kickbacks and other alleged premium add-ons drive up the price of lender force-placed insurance. Some call the process “reverse competition” or “pay to play.” LFPI premiums are paid by the borrowers and not by the lenders. That is, the premiums for LFPI are paid by homeowners and not by the banks. A three-year review of federal court files reveals that the only complaints which survive in court are the complaints in which the homeowners complain about the extra charges added on to the monthly premiums they pay.

The notion that lenders force-place insurance only when borrowers do not meet their obligations, is largely a myth. It is far more likely that lenders will force-place insurance and let the homeowners oppose it if the homeowners can. To the contrary, homeowners make their monthly mortgage payments for the most part – until they no longer can make the payments including the added burden of premiums for “pay to play” force-placed insurance. Then the lenders and their agents foreclose, and the mortgage machine starts all over again.

Thanks, Dennis! And look for his new book, “Lender Force-Placed Insurance,” due out this Spring.
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