Or make my house payment this month?
What? you howl. What do I get out of paying your bills?
Please repeat that question when your mortgage lender gets you to pay for insurance on your home that protects only the lender.
I’m talking about force-placed insurance. The insurance that your mortgage lender arranges when you let insurance on your property lapse or when you fail to name the lender as an additional insured on the policy.
Your mortgage requires that you keep the property insured. When you let the insurance lapse, what happens?
The lender charges you an inflated price for the required insurance that does not protect you or your property at all.
I saw this scenario this week in a pending Chapter 13 case for a lady trying to catch up on her mortgage.
New bankruptcy rules require the bank with a lien on a person’s home to actually tell the borrower and her lawyer what fees and charges have been added to the balance of her loan.
The notice of increased escrow fees on her loan showed a $3000 charge for insurance. Yes, she reported, money had gotten tight and she decided to shift the cost of insuring the home to the lender.
First off, the price of the insurance was almost exactly double what she’d been paying. Apparently big banks can’t shop for the best price.
Worse, the policy the bank bought covers only the value of the property up to the loan balance. In other words, it does not cover any equity in the house. And the lender is the only insured. House burns down, only the lender is made whole.
Nor does it cover the contents of the house. Scarier still, there is no liability insurance to protect my client if someone is injured on the property. She can get sued for the injury and she’ll have to pay for her own defense and any damages awarded.
But wait, it gets worse.
This overpriced insurance is a profit center for the servicer. Sweet when they can get you to pay too much for something that doesn’t benefit you but kicks back dollars to their bottom line.
Regulators, shamed perhaps by journalists, are beginning to look into the force placed insurance industry. The American Banker, of all “people”, reported in 2010 on kick backs and other fees flowing to the banks who service mortgage loans from the insurers who sell them overpriced coverage.
The federal agency that took over Fannie Mae and Freddie Mac has proposed a new regulation barring loan servicers of Fannie/Freddie loans from profiting from force placed insurance.
The first take-away from this primer on force placed insurance is that shifting the burden of getting insurance to the lender does nothing but dig your money troubles deeper.
If you are currently relying on the lender to insurer your home, take steps to get your own insurance. For less money you can get coverage that actually protects you as well as the lender.
Second, new bankruptcy rules give Chapter 13 debtors visibility into charges and expenses being added to their loans. Use that info.
Outside of bankruptcy, a qualified written request under RESPA should produce the same information if you ask for a life of loan accounting. Find out if this has happened to you.
Third, if you are walking away from a property that is underwater, you may be indifferent if the structure burns down.
You are not indifferent if a child is injured on the property while it still belongs to you. The fact you no longer want to keep the property doesn’t alter your legal liability for injuries on the property for as long as you hold title. Get liability insurance so the property doesn’t pull you down through a lawsuit.
Cathy Moran, Esq.
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Last modified: May 22, 2013