Force-Placed Insurance: Another Mortgage Servicer Ripoff

Force-placed insurance is an insurance policy your mortgage service picks out when your homeowners insurance policy expires. It can cost up to ten times more than a regular homeowners policy, in part because mortgage servicers are often getting kickbacks and other incentives due to self-dealing.

American Banker suggests that force-placed insurance may be a far larger problem—for investors and borrowers—than the robo-signing that recently came to light. Borrowers lose out because their mortgage payments become impossible to pay, and investors lose out because force-placed insurance drives more loans into default. Mortgage services and force-placed insurance providers, however, get what Diane Thompson of the National Consumer Law Center calls a “gravy train” from commissions and reinsurance schemes.

As with the near-complete failure of the mortgage modification effort, the problem seems to lie in the screwed-up incentives that mortgage servicers enjoy. They seem to make more money when everyone else—banks, investors, and borrowers—are losing out.

In this case, mortgage servicers claim they are only doing what they are told—investor contracts usually require homeowners insurance for mortgaged properties. As American Banker points out, force-placed insurance is not inherently objectionable, it is the self dealing and consequent lack of competition the is the problem. Investor contracts don’t require ridiculous, backdated, overpriced policies; but mortgage services like just such policies, which line the servicers’ pockets at the expense of investors and borrowers.

The Dodd-Frank Act should have eliminated this sort of thing, but according to Felix Salmon, nobody knows who is supposed to enforce it in the case of force-placed insurance. So it goes on.

(Thanks, Consumerist!)