Letting your homeowners insurance lapse could mean more expensive coverage later on, whether you signed up for it or not.
Known as force-placed insurance, these policies are implemented to protect banks’ interests when a borrower fails to hold up their end of the agreement to keep continuous coverage on their home. Basically, if you are unable to make your premium, allowing a lapse in coverage, your mortgage lender could stick you with this extra (often more expensive) insurance.
The use of force-placed insurance was common during the recession as homeowners who fell behind on their mortgages also stopped paying their insurance, since premiums are typically rolled into the monthly payment. According to the Insurance Information Institute, direct earned premiums for lender-placed insurance more than tripled from $3.1 billion to $954 million between 2006 and 2011.
More recently, government regulators have been looking in to these costly policies and trying to determine whether or not mortgage servicers have been too quick to assign them to delinquent borrowers. It was suspected that these mortgage servicers were receiving some sort of financial incentive related to force-placed insurance. In the spring of 2012, the New York State Department of Financial Services held hearings on the matter, where it was revealed that an American Home Mortgage Servicing affiliate received 15 percent commissions from QBE First, a major provider of lender-placed insurance, for policies placed on its loans.
According to an article from Bloomberg, regulators in three U.S. states said they may also examine the issue. Kevin McCarty, insurance commissioner from Florida; Sharon Clark, top regulator from Kentucky; and James Donelon of Louisiana all expressed concern for the insurer’s business practices.
Because force-placed insurance policies tend to be at least twice as much as a typical homeowners policy, the burden for financially-strapped borrowers only gets worse. Not only do these additional costs weigh down an already distressed homeowner, they could hurt a borrower’s chance at loan modification and possibly push a property into foreclosure. The good news is, Fannie Mae has adopted new mortgage servicer guidelines to help reduce the chances of borrowers getting stuck with an unnecessary high-priced policy. According to a recent article from the New York Times, “The guidelines require the servicer to keep the borrower’s own homeowner policy in force if at all possible, even if that means advancing money to cover the past-due premium.”
Under those same guidelines, the servicer is required to contact the borrower in writing at least twice before putting a lender policy in place. Such disclosures must inform the borrower of the increase in cost and that the lender-placed policy only covers the structure of a house, not its contents. In addition, homeowners do retain the right to buy their own insurance policy and ask to have the lender-placed insurance canceled.
If you would like to learn more about lender-placed insurance, visit the National Association of Insurance Commissioners website: naic.org