Force-placed insurance on your home protects only the lender, not you.
Please repeat: force-placed insurance protects only the lender, not you.
When the mortgage company buys the insurance on your home, you lose.
Every mortgage or deed of trust requires that the borrower have insurance to protect the structure in case of fire or other casualty.
It assures the lender that if disaster strikes, there is protection for its investment in your home.
If you let that insurance lapse, the lender can and will obtain coverage on the property, and add the cost of the policy to the loan.
I can’t tell you how often my clients assure me that the lender has insured their home, believing that they are covered.
Whoa! What the lender has insured is the lender’s interest in the home. The policy is only large enough to protect the bank; the bank is not buying a policy large enough to cover your interest in the home.
What’s covered
Suppose that you have a $200,000 loan on a piece of realty that’s worth $500,000. If you let your coverage lapse, the bank will get insurance with $200,000 in coverage. Your $300,000 interest in the property is uninsured. The bank doesn’t care if you suffer a loss when there’s a catastrophe; it goes out of pocket only enough to protect its exposure.
The “out-of-pocket” phrase brings up another issue. Force-placed insurance is notorious expensive, two, three or four times as expensive as a policy the homeowner can buy to protect the entire value of the house and provide for other insurance protections from liability. The suspicion for years has been that the price of force placed insurance is inflated because the lender either owns the insurer who writes the policy, or has a kick back arrangement with them.
The inflated cost of this insurance gets added to the loan balance, and, in the end, added to the lender’s profits on the deal.
The New York state Department of Financial Services has begun an investigation of the lender practices on force-placed insurance. Gretchen Mortgenson quotes the head of the agency
“Force-placed insurance appears to be the dirty little secret of the mortgage industry,” Mr. Lawsky said in an interview last week. “It is a silent killer harming both consumer and investors while enriching the banks and their affiliates.”
Stay tuned for developments in this investigation. Mortgenson pointedly notes that the big mortgage lenders “declined to comment” on the inquiry.
What’s not covered
What the homeowner also loses when the bank buys the coverage is the range of insurance protection for injuries that occur on the property, not to the property. Homeowner’s insurance protects the property owner from claims for slip and fall on the front porch, for example, and for damage or loss to the contents of the house. You can bet that the bank isn’t paying to protect you from these kinds of loss.
Even if you have decided to walk away from a home that isn’t affordable, keeping liability insurance in place is critical. Our legal system makes property owners responsible for most accidents that occur on their property. The property remains yours until title changes as a result of a foreclosure.
So, unless you are willing to have your future shadowed by uninsured claims for injury on property you are shedding, keep a liability policy in place as long as you are the owner.
If you are keeping the property, arrange for your own insurance that protects both you and the bank, at a price that’s fair.
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