As if people battling a Miami foreclosure weren’t enduring enough, many are also forced to contend with force-placed insurance.
Our Miami foreclosure attorneys are familiar with this shady practice, whereby banks and other lenders can impose their own, cherry-picked insurance policies for homeowners who lapse on their mortgage and insurance payments. This is legal, and it’s called force-placed insurance. The problem, however, has been that in far too many cases, these entities exploit the homeowners’ vulnerable position by overcharging them for this insurance. This is illegal.
Now, a financial regulator in New York is expanding the scope of its investigation into this practice, after finding evidence that insurers and lenders abused their authority. The New York Department of Financial Services has been sending out formal document requests and subpoenas to a host of insurance companies, demanding that they answer how their loss ratios and rates were determined.
A loss ratio is basically the percentage of premiums that an insurance company collects that is then paid out to the policy holder. When regulators first started looking into this last fall, they realized that the loss ratio was as little as 20 cents for every dollar – versus the 55 cents for every dollar that was reported to the regulators.
This legal loophole has long been criticized, even before the mortgage crisis, because it is so easy to exploit, given the close relationships that exist between mortgage servicers and their brokers and insurance companies and their agents. The New York agency is taking a close look at these relationships, as well as the rates that were charged.
In addition to charging very high rates, these policies also rarely have solid protections in place for the homeowner. Here again, they take advantage of people who are already struggling.
What’s more, many individuals have had this high-rate, low-protection insurance forced upon them when it wasn’t legally allowable. In fact, New York officials found that insurance and mortgage companies erroneously forced the coverage on an astonishing 30 to 40 percent of homeowners since 2006.
The ongoing investigation was the reason federal mortgage servicer Fannie Mae started to create distance between itself and the banks when selecting force-placed insurance companies. The idea is to lower costs for both Fannie Mae and borrowers.
This is not simply a New York problem. The insurance commissioner in California recently instructed the 10 force-placed insurance companies there to lower their rates.
With so many homeowners across the country struggling in the wake of a real estate boom, the amount of force-placed insurance increased from $1.5 billion in 2004 to about $5.5 billion two years ago.
Lawsuits have been filed by homeowners, who have claimed in some instances they were charged at a rate of nine times higher than they paid before. Of course, insurance companies say these instances are few and far between, but Miami foreclosure attorneys are aware of other similar cases as well.
For example, a Palm Beach homeowner has alleged in a recent federal lawsuit that when he lapsed on his insurance payments, he was given a force-placed insurance plan that charged him a whopping $10,000 for about a half a year of coverage. Once he reinstated his own coverage, his payments plummeted to about $2,500 for the entire year.