How Force-Placed Insurance Leads to Foreclosure

"Let the truth be known
But they talked that freedom at us
And didn't even leave a ladder" – Lil Wayne, "Tie My Hands"

NEW YORK (MainStreet)—I constantly hear banking and insurance industry professionals stating that only 1% of loans in their loan portfolios have force-placed insurance as a way of defending the practice. According to the Census Bureau, this equates to 7.56 million American citizens being price gouged. That the banking and insurance industries consider this staggering number to be inconsequential isn't even the disgusting part.

Also see: DFS Force-Placed Insurance Legislation is a Joke

The statistics they provide to back this up are a fallacious argument. Banks only report 1% of their loan servicing portfolios as having force-placed insurance, because the product is four to ten times more expensive than a regular homeowner's policy (as reported by Birny Birnbaum during the NY Department of Financial Services hearings on the product, the transcript of which can be viewed here), and it leads people to foreclosure. This allows the bank to remove that homeowner from its portfolio and not include them in the reporting. Allow me to illustrate:

If your insurance policy is $900 per year (the national average, according to Homeinsurance.com), your force-placed policy will be a minimum of $3,600 per year. It's important to know these policies are often backdated (by 6 months on average). Remember the banks give you 90 days' notice before placing a force-placed policy by their own admission. The other 90 days is how long it takes for your insurance company to report your policy as cancelled.

It's also important to know that escrow accounts are a prepaid account for insurance. What this means if you have an escrow account is $75 per month of your mortgage payment goes into an escrow account held by the bank (the bank accrues interest on this account that is opened in your name, but you do not), and at the end of the year, the bank uses these funds to pay your $900 premium (pocketing any interest accrued).

In the event of a policy lapse, that $3,600 force-places insurance policy is backdated 6 months. Assuming you never missed a payment, this means your escrow account at the time of placement is at $450. The placement of this $3,600 policy will wipe out your $450 and leave you with a negative escrow balance of $3,150. This is assuming you have an escrow account. If you don't, your escrow balance will be minus $3,600.

Now remember an escrow account is a prepaid account for insurance. Since the force-placed insurance policy is backdated six months, it's also set to renew in six months. You now have six months to make up for the negative $3,150 (if you had your insurance in escrow) or negative $3,600 (if you did not have your insurance in escrow) balance, along with an additional $3,600 for next year's premium. This means you owe the bank between $6,750 and $7,200.

If you applied for a loan modification and were denied, check your paperwork. There's a good chance it's because you have a negative escrow balance.

This deficit will trigger an escrow analysis by the bank, and the $6,750 to $7,200 will be spread out into your mortgage payments. Assuming you're notified immediately and this escrow analysis is completed immediately, this will increase your mortgage by $562.50 per month if you had an escrow account or $600 per month if you did not.

Also see: Ethical Risk Management: Anonymous Reveals Its Face

Since few American middle class consumers can afford a $560 to $600 per month mortgage increase, this alone will cause a foreclosure, removing them from the bank's loan portfolio and keeping them out of the reported 1% of homeowners affected by this problem...but that's still not even the worst of it...

I was using the smallest end of the premium range (4x) when they can be as high as 10x your premium. I was also assuming you actually deserved to have force-placed insurance placed on your account and it was placed in good faith. There are many ways in which the banks fraudulently place this product for more money, but I don't even have to bother getting into the details of that, because the math speaks for itself.

But wait...there's more...

Consider you live in a state like Florida, where wind/hurricane insurance is mandatory. In Florida, no insurance company will touch wind or hurricane coverage, so it is placed as a separate policy through Citizens Insurance. What nobody is telling you is that force-placed insurance includes wind coverage (read your force-placed insurance policy declarations). This means if you live in Florida and your homeowner policy cancels, but your Citizens wind policy is still active, you're being forcefully charged for duplicate wind coverage without your knowledge. By the same means, if your Citizens wind policy cancels, but your homeowners policy is still active, you're being forcefully charged for duplicate homeowners coverage. So not only is your mortgage payment being raised, but it's being done to provide you with coverage you already have, and that's once again assuming the entire deal was done honestly (which I can assure you, it's not, but that's a whole other issue).

Are you angry yet? Do you think I'm done? Think again...

Another issue being ignored by regulators is a form of force-placed insurance placed by QBE First and Assurant called Real Estate Owned (REO) insurance. REO insurance is placed on property after the bank forecloses on it. You, as the borrower, have no interest in the property and have been removed from the paperwork. The REO premiums, however, are charged to your escrow account. These premiums are highly inflated, and only the loan servicer is named as a payee of the insurance policy. If you, as the borrower, are able to pull your home out of foreclosure, you will be presented with these premiums to pay. If you don't pull it out of foreclosure, then we, the American taxpayer, will be stuck footing the bill through Fannie Mae and Freddie Mac (a situation I attempted on numerous occasions to get both the SEC & FHFA to correct and was ignored). REO insurance isn't included when the banks state only 1% of their portfolio has force-placed insurance.

Also see: Countrywide May Be a Worldcom, But BofA Is no MCI

Haha, and if you think I'm done there, you're wrong once again...

I haven't even touched on the subject of flood insurance, but that is a beast all to itself. I'm not going into detail about how these same companies add this same force-placed insurance product (known generically as Collateral Protection Insurance, or CPI) on every collateral loan to include automobile loans. I'm not showing you the dozens of ways I've seen this system abused to take advantage of innocent homeowners. I'm not factoring in how that negative escrow balance will cause you to miss your tax payments if they are also escrowed, leading to a tax foreclosure. I'm not bringing up the lack of transparency on escrow accounts. I'm only focusing on the math for now to show you why only 1% of homeowners are afflicted with force-placed insurance...because I'm sick and tired of watching these criminals get away with one of the largest fraudulent acts in human history...

Brian Penny is a former business analyst at Bank of America turned whistleblower and freelance writer. He's a frequent contributor to The Huffington Post, Lifehack, and HardcoreDroid. He documents his experiences working with Anonymous, practicing yoga, and fighting the the banks on his blog.

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