Force-placed insurance practices under investigation

The latest investigation into the fallout of the mortgage market has been started by a New York State financial services agency. The question at hand is whether banks charged homeowners exorbitant amounts for mortgage insurance.

The practice of force-placed insurance

Home insurance is often a requirement of any mortgage deal. This insurance is required in order to protect the property that the bank and mortgage holder co-own until the mortgage is paid off. If a homeowner is not able to keep up with payments on their insurance, the bank will often put force-placed insurance on the mortgage. This insurance covers the home but is often much more expensive than a traditional insurance policy may have been. Legally, mortgage holders are allowed to take out insurance on a mortgage they own if current coverage lapses.

[Insurance on personal loans is often standard practice, but not on small dollar amount personal loans.]

Charging too much

The allegation is that several banks, including Bank of America and Citigroup, not only put force-placed insurance on troubled mortgages but overcharged homeowners for that service. Some of these force-placed insurance policies were as much as 10 times as expensive as similar insurance policies. In addition to being much more expensive, investigators say the expensive insurance plans were underwritten and financed by affiliated insurance companies that gave kickbacks and payments back to the banks. The existence of force-placed insurance on a mortgage makes refinancing or selling a mortgage particularly difficult and has prevented some homeowners from receiving mortgage assistance.

Potential immunity

Though the New York state financial agency is investigating force-placed insurance, there is a possibility that a settlement could make the investigation moot. Federal officials are currently negotiating a settlement with large banks over foreclosure abuses. The current state of negotiations means that nobody is certain whether immunity offered by these negotiations would extend to the policy of force-placed insurance.

Sources

Reuters
NY Times
BizJournals