The force-placed insurance scandal

By Felix Salmon
November 9, 2010
Jeff Horwitz has a spectacular piece of reporting today about goings on in an obscure corner of the mortgage-servicing world known as force-placed insurance.

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American Banker’s Jeff Horwitz has a spectacular piece of reporting today about goings on in an obscure corner of the mortgage-servicing world known as force-placed insurance. Essentially, if a homeowner fails to keep up their insurance premiums, then their loan servicer will step in and buy an insurance policy on their behalf, to ensure the home remains insured. It’s all perfectly sensible in theory. But in practice, it’s ripe for abuse, especially when the servicer owns the insurer.

Consider one case found by Horwitz. A homeowner had a $4,000 insurance policy, which was paid by the loan servicer, Everbank, from an escrow account. But Everbank allegedly let that insurance policy lapse, allowing it to replace the policy with a different policy, this one costing more than $33,000. The insurer, a subsidiary of Assurant, then paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

$7,100 is an insanely enormous amount of money for a loan servicer to make on a single property: the average loan servicer makes just $51 per loan per year. And of course it’s not the servicer paying that $33,000 insurance premium — that money is ultimately paid by the investors who bought the loan. Those investors are, understandably, not happy.

There are lots of variations on the force-placed insurance scam. For instance, JPMorgan Chase buys overpriced insurance from a third-party insurer, which then reinsures the property with JPMorgan Chase. This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.

Then there’s the practice of back-dating insurance — essentially, buying insurance against an event which you know for a fact hasn’t happened. Horwitz talked to attorney Jeff Golant, who was trying to sort out his mother’s mortgage:

His client was current on her mortgage and claimed the lapse of insurance coverage on her home was the result of her previous insurer’s error. Much of the new policy’s coverage was redundant, Golant said, duplicating flood and wind policies that had remained in place. Moreover, charging her for retroactive hurricane protection, for a year when there had been no significant storms, struck Golant as inherently ridiculous.

“I really thought they’d added an extra digit,” he said.

The National Association of Insurance Commissioners says that policies “should not be back-dated to collect premiums for a time period that has already passed,” but the practice seems to be commonplace in the world of force-placed insurance. As is the existence of extremely cozy relationships between insurer and servicer:

The case got stranger when Golant’s client visited the address listed for the insurer in an unsuccessful attempt to sort things out, he said. While the people there claimed to represent the servicer, they were operating out of an office belonging to a force-placed policy insurer since acquired by QBE Insurance Group.

Golant didn’t understand why the insurer would be speaking on behalf of the servicer. But shortly after he began asking questions about the relationship between servicer and insurer, the case settled. Confidentially. At the insurer’s request…

According to both Assurant’s SEC filings and the marketing materials of a subsidiary of rival QBE Insurance Group, the insurers don’t just write policies on request — they also enter into long-term agreements to detect uninsured properties in their clients’ servicing portfolios and perform other back-office functions. It was precisely such an arrangement that Golant’s first client ran into when she tried to visit her servicer, he says — the insurance company employees had taken over the servicer’s role.

Horwitz has found one case where an $80,000 property was being insured for $10,000 a year, and also notes that at Assurant, “the unit handling force-placed insurance has accounted for $811 million of its $879 million in profits during the last two years.”

The good news here is that there’s a specific provision in the Dodd-Frank act requiring that force-placed insurance be “bona fide and reasonable”. The bad news is that it’s far from clear who is in a position to enforce that particular law. And in the meantime, loan servicers would seem to have every incentive to drag out delinquencies as long as possible, if doing so means they get massive insurance revenues. Or the kickbacks associated with them.

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Comments
14 comments so far

This is why I’ve never agreed to an escrow account. Banks have always been willing to waive that requirement (given a clean credit history). I’m much less likely to miss a payment than the servicer, and *I’m* the one who ultimately must deal with the headaches if one is late or skipped.

Posted by TFF | Report as abusive

“bona fide and reasonable” is a judgment call for good faith not a congtract, nor a law.

What that means is the insured has to make the effort to prove it isn’t reasonable, not vice versa. And being the rip off already took place you can bet there was lots of paperwork to show it was bona fide. (rather like my lawyer writing down every paper clip he uses to make a long list of things he does for his bona fide costs) With an aging population rip offs are going to be even more common place.

State consumer watchdogs programs and financial regulations with teeth and enforcement are the only answer.

Posted by hsvkitty | Report as abusive

Felix,

This piece was being circulated in a way that made it appear someone else was the author —

I failed to check to see if it was a cut & paste job — and I gave the authorship credit to someone else here (http://www.ritholtz.com/blog/2010/11/la test-mortgage-scandal-force-placed-insur ance/)

I’ll correct that now and make it clear that you were the author . . .

Posted by Ritholtz | Report as abusive

You did a great job, but this is far from the only dark corner in which you will find shady business practices in the force placed insurance industry.

Check out my blog for very detailed info on how to uncover the rampant fraud.

http://azmikversable.wordpress.com/2011/ 03/16/faq-which-documents-should-an-atto rney-subpoena/

Posted by Azmikversable | Report as abusive

“Horwitz has found one case where an $80,000 property was being insured for $10,000 a year, and also notes that at Assurant, “the unit handling force-placed insurance has accounted for $811 million of its $879 million in profits during the last two years.”

Forced Placed insurance premiums of $10k for an $80k property is just ridiculous. I can’t believe that is legal. Here is another site I found that expands upon Force Placed Insurance…
http://lenderprovidedinsurance.com/

Posted by ForcePlaced | Report as abusive

I’m shocked, shocked to find fraud going on in the insurance industry! I’ve been reading your articles Felix as preparation for getting a comprehensive home and health package for myself and so far I can find nothing even remotely positive about this industry. Perhaps it is true what the curmudgeons say about insurance being akin to gambling even so far as it appears to be run by organized criminals!

Jack
http://www.accidentinjurydirect.co.uk

Posted by jacktrip | Report as abusive

This just scratches the surface, the forced placed industry is corrupt on all levels. Huge profits are raked in at the expense of the insured. I was in the servicing end for years, I got out just before the crash. Banks were buying and selling loans like crazy. One of my clients was selling loans it hadn’t even processed yet. We would receive the paper work and try to enter the new loan and the system would tell us the loan was sold….. How is that even possible…when you have no oversight you can do whatever you like. As long as the CEO was getting his huge bonus he didn’t care. When the market collapsed I figured it would finally correct itself. Well, it didn’t the abusers got baled out, jacked up fees on its account holders to pay for the minimum oversight it had to deal with and went back to business as usual. My particular CEO didn’t lose a cent, as a matter of fact his profit center was awarded Center of the Year in 2009 and 2010. They brought in record profits from the forced placed business. Gotta love Capitalism, nothing like it. My three year gag order is up, maybe I’ll write a book…..

Posted by FredMvUrHd | Report as abusive

There is way more to this scam than is written here. Most Servicers put themselves down as the Loan originator or the Mortgagee when they are nither. This is fraud. If they haven’t filed the right paperwork at the courthouse then they have no right to force place anything as they are not the owner of record. My wife and I caught our supposed Mortgage Servicing Company Select Portfolio Servicing conspiring to commit fraud on us in 2010 and the insurer quickly refunded our money and then in league with the servicer, reprted it to the servicer who then forged and filed a fake assignment at our courthouse, trying to keep themselves in the loop for more fraudulent money. For information and help go to Homeowners Against Mortgage Servicing Fraud on facebook.

Posted by royblizzard | Report as abusive

I am an insurance agent and googled Provident Mortgage /QBE Insurance-thinking maybe they are connected since Provident is trying to rip off my customer. I couldn’t believe I came up with! exactly what I have been complaining to our ins commissioner about..who seems less than interested in stopping this behavior. Provident held a policy renewal and purposely issued a binder with QBE while holding our resonably priced policy in file. The loan number wasn’t right -but they had the policy matched up with the customer and in the file and they had it for the right loan and they knew it and went ahead and bound with QBE anyway, I called them on their lie…and they poo poohed it. I got in touch with QBE however who is the only one who seemed concerned and now I come across this…I don’t know what to think

Posted by Marhey | Report as abusive

I’m looking for the outline of legislation the current administration is attempting to pass visa vis Dodd-Frank?

Hopefully, the ink dries and I can demand reimbursement of six times extortion of normal homeowners insurance.

Posted by tgimacb | Report as abusive

I am paying an outrageous amount of $3,400.00 a year to QBE First for Home Owner Insurance. Any direction or help?

Posted by 1deserveit | Report as abusive

I am paying an outrageous amount of $3,400.00 a year to QBE First for Home Owner Insurance. Any direction or help?

Posted by 1deserveit | Report as abusive

My father had been struggling with Bank of America for about 4 months to prove that we weren’t in the flood zone, but they started charging him flood insurance for about $1,300/yr. Since I’m in real estate, I told him he could get an updated flood zone map from city hall. The city hall FEMA flood zone map was more accurate than the national FEMA map. Therefore, we proved that we weren’t in the flood zone, and they reimbursed only part of our money b/c it stated that we owed flood insurance costs for the time we weren’t covered. Then we had to call Bank of America back and say again that we didn’t need flood insurance again and were finally reimbursed for everything. That was the first mortgage.

Now, the second Mortgage, under Seterus, is having QBE first Insurance charge us $1,400/yr, even after we sent them the correct flood zone maps. They state that the flood zone map doesn’t mention that the garage isn’t out of the flood zone, so we need full coverage for the entire mortgage on the house. We even called FEMA, and they stated that it was ridiculous that QBE was still trying to charge us. Now we have to go back to city hall and ask them to include the wording that the garage is included in the house and that they are both out of the flood zone.

I would suggest everyone that has been forced into buying flood insurance to consult with their city hall engineers and not the internet websites. An engineer has been trained to understand the maps, as a flood insurance salesperson/businessman can only guess what is correct to cover themselves from liability, so they’ll charge anyone that’s in the vicinity (legal or not).

Posted by QBE | Report as abusive

I was a victim of forced insurance- it goes back a few years and I vigorously protested. I was not notified for half a year so it was back dated and I was refused the opportunity to back date just as Wachovia had one.

my insurance agency had not informed me of the deficiently and in fact one storm where I had damage I was not covered and had to pay for damage myself
what is the statutes of limitation at the time Wachovia played a game. Since then I got a threat of place insurance when my agent did not sent the endorsement . That forced insurance fee was $56,000. I suspected fraud by Wachovia and will examine file . What is the statute of limitation . I talked to an attorney about itt at the time, but he said I would be wasting my time.

Posted by thoma | Report as abusive
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