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).

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