When homeowners stop paying their insurance, banks get to charge them with their insurance policy of choice.
These force-placed policies cost as much as 10 times the market price, according to an expose by Jeff Horwitz at American Banker (via Felix Salmon). Consequently these policies, which are meant to protect the investors in mortgage-backed securities, they often just drive people into foreclosure.
But this goes beyond bureaucratic inefficiency. When mortgage servicers own the insurer, both parties can drive up fees, and the investors and homeowners get screwed.
Here’s one case being litigated now, from American Banker:
EverBank Financial Corp’s servicing arm had allegedly allowed a borrower’s $4,000 escrowed insurance to lapse in error and then replaced it with a policy costing more than $33,000. In response to written questions, a subsidiary of Assurant, one of the country’s biggest specialty insurers, revealed that it hadn’t kept all the money that EverBank’s servicing operation had paid it. Instead it immediately paid EverInsurance, the servicer’s subsidiary, a $7,100 “commission” and left the door open to further compensation.
For Golant, this set off alarm bells: instead of trying to place affordable insurance on his client’s home, EverBank had taken what was at minimum a $7,100 cut. That was more money than EverBank would ever collect from actually servicing the loan, and EverBank had done nothing to earn it — except let Assurant write a high-priced policy on his client’s house.
“The ‘commissions’ that [Assurant] paid … were in fact kickbacks,” the attorney wrote in a complaint still being litigated. “This incentivized EverHome to select the most expensive force-placed coverage available, and to force-place insurance as frequently as possible.”
Note that the case is still being litigated. This kind of corruption is tricky to unravel, and many of the outrageous policies, like mandatory retroactive hurricane insurance, are legal in most states.
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