Forcing insurance on homeowners-the continuing saga of "force placed" insurance-an update

We have previously commented on misconceptions about force-placed insurance (where mortgage lenders buy expensive insurance for themselves to protect their interest in a borrower's home). http://njbankruptcyblog.blogspot.com/2011/03/force-placed-insurance-when-your.html. The New York Times has updated us on the use and abuse of the lender's right to maintain insurance in two recent articles:
"How to Handle Force-placed Insurance"
 http://www.nytimes.com/2012/01/21/your-money/home-insurance/how-to-handle-force-placed-insurance-wealth-matters.html?_r=1.
"Hazard Insurance with its own perils"
 http://www.nytimes.com/2012/01/22/business/hazard-insurance-with-its-own-perils-fair-game.html?_r=1

Disputes over force placed insurance have been going on for some time. In our November 11, 2011 posting, we reviewed In re Taylor, 655 F.3d 274 (3d Cir. 2011), involving a dispute with a mortgage lender which had added the cost of forced placed insurance to mortgage arrears. http://njbankruptcyblog.blogspot.com/2011/11/third-circuit-issues-warning-to-lawyers.html.

These articles point out the cozy relationships that existed in some cases between the mortgage servicers and the insurers who provide the high cost force-placed insurance. That insurance is a profit center; its high cost and lack of protection makes it an especially bad deal  for the borrower. The lender is justified in keeping the property insured, and if the borrower lets the existing coverage lapse, the lender has no choice.

However, we have seen cases where the lender is collecting and escrowing for the insurance premiums. When the loan goes into default, the lender lets the existing policy lapse and buys force-placed insurance at higher cost. This would be justified if the property has been vacated (because most homeowners policies require continued occupancy). If the property is still occupied, however, common sense would dictate that the lender keep the existing policy in place with its lower premiums that buyer higher cost replacement coverage. I have not heard a good response for not doing so where the borrower continues to occupy the home.

In any event, what the author of the first article reminds us is that a lot of these abuses can be nipped in the bud. Do not ignore notices that tell you your regular homeowners insurance is being canceled. It is easier and less expensive to pay the premium for such insurance yourself than to fight with the lender later over the added monthly cost of force-placed insurance that does not even protect you. On the other hand, if the lender is acting wrongly (note that they have the right to buy such insurance when they need to), it is time to see an attorney and to take legal action. Class actions against some lenders for such practices have already gotten underway.

But again, prevention is the best cure. Who wants the stress and expense of battling with the lender even if they win. At the same time, make noise and let the lender, your attorney, your legislative representatives, and anyone else who will listen know what is happening.

The system of home mortgage lending is malfunctioning if not already broken. Borrowers need not put up with abuses, but need to be proactive, savvy and attentive. Prompt legal advice on what to do when a mortgage goes into default is an important first step.

For more help with these and related topics, see our website at http://www.nv-njlaw.com.