[This post revisits the cynicism of a previous post. As I told some friends this morning, some people may say I’m cynical, but I’m just a realist.]
Closely related to a previous post, I noticed an article on Bloomberg about something else lenders do that forces borrowers into foreclosure.
All mortgages require homeowners to maintain insurance on their property. Most mortgages also allow the lender to purchase insurance for the home and “force-place” it if a policy lapses or is deemed insufficient. These standard provisions are meant to protect the lender’s collateral — the property — if a calamity occurs.
Here’s how it generally works: Banks and their mortgage servicers strike arrangements — often exclusive — with insurance companies in which the banks agree to buy high-priced policies on behalf of homeowners whose coverage has lapsed. The bank advances the premium to the insurer, and the insurer pays the bank a commission, which is priced into the premium. (Insurers say the commissions compensate banks for expenses like “advancing premiums, billing and collections.”) The homeowner is then billed for the premium, commissions and all.
It’s a sweet deal for the banks, who can get large amounts of money – over $5.5 billion in 2010, according to the Center for Economic Justice. In New York, nearly 15 percent of the premiums go back to the banks.
By adding these expenses to borrowers (often 5-10 times the previous insurance premiums), some lenders force borrowers into foreclosure. The banks get their 15% kickback from the insurance companies, the borrower goes into default, the bank forecloses on the property at a loss, and then the government (who often insures such loans for the lender) compensates the bank for the shortfall. This means that the insurance companies will be paid, the banks will be paid, the government pays the bill, and the only person who is out anything is the borrower – also known as “the former homeowner.”
