Given all the controversy over the Affordable Care Act’s insurance mandate, you might think that Americans have never before had to buy coverage. But for millions of homeowners, this is not the case at all.
If you have a mortgage, you are very likely to have an insurance warrant too – the mandate that has far more teeth than the relatively modest and unenforceable penalties in healthcare law. The lender can go out and buy insurance for you and bill you. This is called compulsory insurance, and it’s usually not a bargain.
Lenders have good reason to insist that homeowners keep their properties safe. If a foreclosed home is destroyed due to a fire, flood, or other disaster, the lender forfeits its guarantees. It is unlikely that borrowers will continue to pay their mortgage on an uninhabitable home.
This is why lenders always specify the type and amount of insurance that borrowers must maintain. To ensure its preservation, lenders often, but not always, collect money from the homeowner and keep it in escrow until the insurance bill is due. Then the lender pays the insurance company directly. The homeowner can still choose the insurance company, as long as the lender is named as an additional insured party on the policy.
I have no disagreement with this arrangement. But I have a big problem with what often happens when a homeowner responsible for paying insurance bills fails to do so – that is, the bank steps in to buy insurance instead.
This is what happened to me recently. Wells Fargo holds a mortgage on a Florida home close to the shore and, as a result, requires three separate policies: the primary homeowner’s contract, federal flood insurance, and wind damage insurance in the event of a hurricane or hurricane.
Wells Fargo pays the homeowner and flood policies through escrow, but for reasons that aren’t clear to me, it has never taken responsibility for a wind policy. I am paying for it myself.
However, in December, my old coverage expired, and I did not receive a new bill from my carrier. Wells Fargo noticed the error before I did and alerted me. But before I could get my old coverage back, the bank bought its own insurance policy, from an out-of-state insurance company, the Voyager Indemnity Insurance Company. The bank, on my behalf, has agreed to pay Voyager $ 6,916 annually for coverage of $ 184,000.
The insurance premium for the policy I arranged for myself was $ 899. Bank policy was more than seven times that cost.
I don’t have to pay for the ridiculously overpriced policy the bank bought me. Once I brought my bank’s attention to the fact that I had already set up my own policy, he canceled the Voyager plan and wrote to me to tell me I wouldn’t have to pay for it. But the example I gave illustrates what can happen to a home owner who is not paying attention.
Another Florida home owner filed a class-action lawsuit against Wells Fargo for allegedly receiving commissions on flood insurance. Similar cases are proceeding in other parts of the country, including New York, where a federal judge recently authorized class action lawsuits against Citibank and MidFirst Bank.
In November, Fannie Mae proposed a plan that would improve the situation, at least for nearly a third of homeowners whose mortgage was guaranteed. The plan would have required the banks serving the loans guaranteed by Fannie Mae to obtain any insurance imposed through a group of insurers that agreed to provide coverage at 30 to 40 per cent less than the current prevailing rates. However, recently the Federal Housing Finance Agency, which needed to approve the plan, announced that it would not do so. Meg Burns, associate director of the Office of Housing and Regulatory Policy at FHFA, said that Fannie Mae’s plan “will not be part of the new direction” the FHFA will take in addressing the power posture issue. American banker. (1)
The Financial Consumer Protection Bureau also recently addressed the issue of forced insurance, citing the topic 478 times in the new mortgage service rules issued in January. However, the regulations mainly deal with the amount of notice banks must provide before establishing compulsory insurance and avoid the issue of costs and allegations of bribes. In my particular case, better notification practices were sufficient, so I’m glad to see CFPB address this, but the bigger issues remain. There is also a high risk that future court rulings could nullify any actions the CFPB takes on the grounds that its director, Richard Cordray, was improperly appointed without Senate approval.
Given the lack of work on the National Front, some regulators in the country are trying to offset this slump. In Florida, the Bureau of Insurance Regulatory recently pressured one of the state’s largest insurance companies to cut rates by 18.8 percent. Regulators achieved this by rejecting a previous request from Praetorian, a subsidiary of QBE, to cut prices by only 2.2 percent. The price change is expected to save homeowners $ 98 million. That’s good news, but it does nothing to help homeowners who choose a different insurance company or homeowner to mortgage servants who live outside Florida.
Banks are exposed to a lot of undue bad press and an unfair share of blame for mortgage failures in recent years. But enforced insurance is one of the few areas where bankers are their worst PR agents. Accepting commissions to provide insurance on behalf of their clients is an inherent conflict of interest, and forcing consumers to pay for insurance policies that cost several times what they are entitled to is just bad business. If bankers don’t have the mind enough to get their noses out of that trough, the regulators or the courts will eventually drag them away.
1) American Banker, “FHFA kills Fannie Mae-Placed insurance”