Forced insurance policies cripple Minnesota homeowners [Star Tribune (Minneapolis)]
By Jeffrey Meitrodt, Star Tribune (Minneapolis) | |
McClatchy-Tribune Information Services |
The lot is overgrown, paint is peeling and two ragged posts are all that's left of the front railing. It has been years since Keeney could afford to maintain her home the way she wants. At 77, an age at which the former stockbroker thought she would be comfortably retired, Keeney is toiling away as a substitute teacher, trying to keep her lender from foreclosing on her home.
"I would rather not be working, but I need the money," she said.
Like thousands of other Minnesotans, Keeney's financial problems involve force-placed insurance, a little-known form of coverage generating billions of dollars in profits for insurers and banks -- but getting little scrutiny from state regulators.
Billed as a policy of last resort, force-placed insurance is routinely imposed on homeowners by lenders when property is not covered against tornados, floods and other hazards. The coverage can cost 10 times as much as typical homeowners insurance despite offering less protection.
Across the country, the high premiums are pushing hundreds of thousands of vulnerable homeowners closer to default as the costs are added to their monthly mortgage.
When Keeney's homeowners policy lapsed, she was pushed into a forced-placed policy at an annual cost of
Unlike most states,
The department is reviewing its policies, and has requested current rates and other documents from firms providing force-placed insurance in
Regulators in other states have also begun scrutinizing the industry after consumer advocates complained about alleged price gouging and questionable ties between insurance companies and lenders.
Mortgage lenders typically receive a commission from carriers when they push their clients into force-placed coverage. Those commissions and other payments are big business for banks. For example,
"These [banks] are making more money by keeping things in foreclosure rather than trying to fix things," said
Mortgage lenders and insurance executives say force-placed policies are necessary to protect the bank's investment when the homeowner can't. And, they note, homeowners are warned in advance when they face forced placement and are encouraged to buy their own insurance beforehand.
"We've found that large mortgage servicing companies -- and even small ones -- do not want to force place," said
'It can be devastating'
Like many homeowners who end up with force-placed insurance, Keeney has struggled with her finances for years. Her problems revolve largely around her two adult children, who suffer from mental health issues. Neither has a full-time job. To help support them, Keeney took out home-equity loans totaling more than
Between her investments and teaching income, Keeney earns about
"It can be devastating," said
In many cases, homeowners should never have been pushed into such coverage. Nationwide, about
But mistakes can take months to correct. Homeowners must challenge the placement and endure high premiums until they convince lenders there was an error.
"They shouldn't be making that many mistakes," said
As an example, Pizor pointed to the case of
The Cotherns' insurer provided proof of coverage, but AHMSI refused to cancel the second policy. Instead, the lender placed the Cotherns' account into default and began tacking on late fees. It began foreclosure proceedings in 2009. Eventually, the judge concluded, the Cotherns were forced to seek bankruptcy court protection to prevent the loss of their home.
The judge ordered the bank to reinstate the loan and forgive all late charges and other improper assessments. "The incompetence here is absolutely radiant," he said in his ruling.
High rates, few claims
From 2004 to 2011, the average loss ratio in
Such a low claims rate is unusual in the insurance industry. By comparison, insurers in the regular homeowners market spent 91 percent of their premium dollars on claims. Nationwide, the loss ratio for force-placed insurance was 24.2 percent from 2004 to 2011, far below the rest of the market, Birnbaum said.
At a May hearing in
Insurers said losses were also low due to a long period in which there were few catastrophic events. They said many homes they insure are risky propositions because they have been neglected during foreclosure proceedings or are in states with high exposure to catastrophic events, such as
Some regulators don't buy that argument, noting that current losses are about half of what insurers originally projected. Regulators also are concerned about lack of competition. Just two companies control more than 90 percent of the force-placed market:
Lenders won't talk
While insurers estimate that just 2 percent of mortgage holders typically wind up with force-placed insurance, virtually every mortgage servicer in the country has to deal with the problem. But lenders don't like to talk about the business.
Four of the nation's five largest mortgage lenders -- Wells
The
When asked if the
"I can see how somebody would think that."
___
(c)2012 the Star Tribune (Minneapolis)
Visit the Star Tribune (Minneapolis) at www.startribune.com
Distributed by MCT Information Services
Wordcount: | 1451 |
Sinclair Risk & Financial Management Nationally Recognized as a Best Practices Agency by the IIABA
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News