Forced Insurance for Homes, Not Health

Considering all the controversy over the insurance mandate in the Affordable Care Act, you might think Americans have never before been forced to buy coverage. But for millions of homeowners, that is not the case at all.

If you have a mortgage, chances are extremely good that you have an insurance mandate too – a mandate that has a lot more teeth than the health care law’s relatively modest and unenforceable penalties. Your lender can go out and buy insurance for you, sticking you with the bill. This is called force-placed insurance, and usually it is no bargain.

Lenders have good reasons to insist that homeowners keep their property insured. If a mortgaged home is destroyed by fire, flood or some other catastrophe, the lender loses its collateral. Borrowers are just not likely to keep paying the mortgage on a house that is not habitable.

This is why lenders almost always stipulate the type and amount of insurance that borrowers are required to maintain. To ensure they maintain it, lenders will often, but not always, collect the money from the homeowner and hold it in escrow until the insurance bill comes due. Then the lender pays the insurance company directly. The homeowner can still choose the insurer, as long as the lender is named as an additional insured party on the policy.

I have no quarrel with this arrangement. But I have a big problem with what often happens when a homeowner who is responsible for paying insurance bills directly fails to do so – namely, the bank steps in to buy insurance instead.

This happened to me recently. Wells Fargo holds a mortgage on a home in Florida that is close to the beach and, as a result, requires three separate policies: a basic homeowner’s contract, federal flood insurance, and wind damage insurance in case of hurricane or tornado.

Wells Fargo pays the homeowner and flood policies through escrow, but for reasons unclear to me, it has never taken responsibility for the wind policy. I pay that one myself.

In December, however, my old coverage expired, and I never received a new bill from my carrier. Wells Fargo noticed the oversight before I did and alerted me. But before I could reinstate my old coverage, the bank bought a policy of its own, from an out-of-state insurer, Voyager Indemnity Insurance Company. The bank agreed, on my behalf, to pay Voyager $6,916 a year for $184,000 of coverage.

The premium on the policy I arranged for myself was $899. The bank’s policy was more than seven times that cost.

I don’t have to pay for the ridiculously overpriced policy the bank bought for me. Once I called the bank’s attention to the fact that I had already reinstated my own policy, it cancelled the Voyager plan and wrote to tell me I would not have to pay for it. But my example goes to show what can happen to a homeowner who is not paying attention.

Another Florida homeowner has filed a class action suit against Wells Fargo for allegedly receiving kickbacks on force-placed flood insurance. Similar cases are moving forward in other parts of the country, including New York, where a federal judge recently allowed a class action suit against Citibank and MidFirst Bank to proceed.

In November, Fannie Mae proposed a plan that would have improved the situation, at least for the approximately one-third of homeowners whose mortgages it guarantees. That plan would have required banks servicing loans guaranteed by Fannie Mae to obtain any force-placed insurance through a consortium of insurers that had agreed to offer coverage at 30 to 40 percent less than the current prevailing rates. Recently, however, the Federal Housing Finance Agency, which needed to approve the plan, announced that it would not do so. The Fannie Mae plan “will not be part of the new direction” the FHFA will take in addressing the force-placed issue, Meg Burns, a senior associate director of the FHFA’s office of housing and regulatory policy, told American Banker.

The Consumer Financial Protection Bureau has also recently taken on the issue of force-placed insurance, citing the topic 478 times in new mortgage servicing rules released in January. The regulations, however, mainly deal with how much notice banks must provide before instituting force-placed insurance and skirt the question of costs and the allegations of kickbacks. In my particular case, better notification practices would have been sufficient, so I am happy to see the CFPB addressing this, but the larger issues remain. There’s also the significant risk that future court rulings might invalidate any actions taken by the CFPB on the grounds that its director, Richard Cordray, was improperly appointed without Senate confirmation.

Given the lack of action on the national front, some state regulators are trying to pick up the slack. In Florida, the Office of Insurance Regulation recently pressed one of the state’s largest force-placed homeowners insurance companies to lower rates by 18.8 percent. The regulators achieved this by rejecting an earlier application from the company, Praetorian, a subsidiary of QBE, to reduce rates by only 2.2 percent. The rate change is expected to save homeowners $98 million. That’s good news, but it does nothing to help homeowners whose mortgage servicers select a different insurer or homeowners who live outside of Florida.

Banks get a lot of undeserved bad press and an unfair share of the blame for the mortgage fiasco of recent years. But force-placed insurance is one of a few areas where bankers are their own worst P.R. agents. Accepting commissions for placing insurance on behalf of their customers is an inherent conflict of interest, and forcing consumers to pay for policies that cost many times what they are worth is just a nasty business practice. If the bankers don’t have sense enough to get their noses out of this trough, regulators or the courts will eventually drag them away.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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