What Is Force-Placed Insurance?
If you have a mortgage, then odds are that the mortgage provides for force-placed insurance. Force-placed insurance is a common feature in mortgages. Lenders want to be sure that the asset backing their loan will be there if it needs to be repossessed. In theory and in principle, this idea makes sense. If a homeowner refuses to purchase insurance, then the lender should be able to insure the house to protect its investment.
The problem is that many lenders purchase insurance policies that are often twice the cost of normal homeowner's insurance. On top of that, some lenders either own the insurance company or receive a kickback from the insurance company. I was reviewing the escrow account history of a loan yesterday. It reflected insurance payments of roughly $3,500. The house in question was worth about $225,000.00. That inflated price is typical of force-placed insurance.
Most homeowners are never aware that they have been charged for this type of insurance. The vast majority of home buyers seem to prefer setting up an escrow account for managing their property tax and insurance payments. In a perfect world, the insurance policy that the homeowner purchased prior to closing is renewed each year with funds from the escrow account. Force-placed insurance is never purchased because there is no need; the property is insured.
For most homeowners, the problems with force-placed insurance arise when they default on their mortgage payments. Some lenders will automatically force-place insurance when a default occurs. Others will begin to force-place insurance when escrow accounts have a negative balance. Since most people do not fight foreclosure lawsuits, the excessive fees go unnoticed. They are either tacked on to the judgment amount awarded by the court, or they are wrapped up in the loan's balance in a loan modification.
Homeowners that maintain their own savings account for property taxes and insurance may also discover that their lender has force-placed insurance on their homes. If a lender loses or does not receive proof that the homeowner is maintaining an insurance policy, then it may force-place insurance.
The best way to identify forced-placement of insurance is to examine a loan's payment history and the escrow account's history. Large payments billed against the loan balance are generally one of two things: property tax or force-placed insurance. Even the most illegible account histories tend to use "tax" as a notation for tax payments.
The Consumer Finanace Protection Bureau is currently working on proposed rules designed to regulate and reform the practice of force-placing insurance. These rules will likely focus on requiring lenders to provide borrowers with an estimate of the costs of force-placed insurance before providing it, and would require lenders to cancel force-placed insurance policies within 15 days of receiving notice that the homeowner has purchased an insurance policy.
In the meantime, homeowners facing foreclosure can always maintain their own insurance policies, even if they were paying for insurance via an escrow account. If the lender continues to force-place insurance after being notified that the homeowner has purchased a policy, then the homeowner may have a valid counterclaim against the lender. This counterclaim could, in turn, offset the amount due on the mortgage loan.
The act of force-placing insurance also has implications for homeowners trying to save their homes via a Chapter 13 bankruptcy plan. A force-placed policy may violate a confirmed plan and give rise to a lawsuit against the lender. Until regulation forces the industry to change its practices, homeowners must remain vigilant and pay attention to their mortgage statements.
If you feel that your lender has improperly force-placed insurance on your home, it may be wise to consult with a licensed attorney to explore your options.