Jeff Horowitz at American Banker has a cool story to add to the mortgage servicer conflict-of-interest meme. It’s all about — wait for it — forced-place insurance.
This is the stuff that banks foist onto mortgage borrowers (to protect mortgage investors) if the borrowers don’t take it out and pay for it themselves. Sounds reasonable, right? And it is, except that the opportunity for profiteering does exist. The hint is in the “forced” bit of the forced-place insurance name — synonymous with “selected by your bank”, which may or my not own its own insurance biz.
From the article:
When banks buy insurance on the homes of borrowers whose policies have lapsed, they get a great deal. Just not for the homeowners and investors who have to pay for it.
Nominally purchased to protect the owners of mortgage-backed securities, such “force-placed” insurance can be 10 times as costly as regular policies, raising struggling homeowners’ debt loads, pushing them toward foreclosure — and worsening the loss to investors on each defaulted loan.
Evidence of abuses and self-dealing in the force-placed insurance industry suggests that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes.
Behind banks’ servicing insurance practices lie conflicts of interest that align servicers and their insurer partners against borrowers and investors. Bank of America Corp. owns a force-placed insurance subsidiary, and most other major servicers receive commissions or reinsurance fees on the very same policies they purchase on investors’ and borrowers’ behalf.
And just going back to the circular point — Horowitz cites evidence that JP Morgan Chase manages to reinsure forced-place insurance on its loans. The practice hasn’t gotten much attention outside the industry but as more loans go delinquent (and more borrowers can’t afford their insurance) it’s becoming more prevalent.
The good news, as Felix Salmon notes, is there’s a specific provision in the new Dodd-Frank act that stipulates forced-place insurance charges must be “bona fide and reasonable.” Though — like the “reasonable recovery” language in mortgage servicing/advancing agreements — the wording is rather open to interpretation.
Once again — over to you, regulators.
Related links:
The least ‘advanced’ mortgage servicers – FT Alphaville
A look at how unregulated servicers are… – Rortybomb
Deutsche Bank on the perfect mortgage company – FT Alphaville