Did some of America's largest banks profit by purchasing high-priced fallback insurance policies on homes facing foreclosure?
That's what New York's state financial regulators want to know in an ongoing probe of the loan servicing operations at several large banks, including Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.
The probe centers on "force-placed" insurance, a policy that mortgage lenders purchase in order to make sure the home remains insured when a homeowner lapses on their own homeowners insurance policy . The cost of a force-placed policy, which can run as high as 10 times what the homerowner was paying, winds up adding to the struggling homeowner's debt load, pushing them closer to foreclosure.
That sorry scenario alone didn't prompt this investigation. Instead, New York's Department of Financial Services chief Benjamin Lawsky wants answers on cases in which the mortgage servicing units of large banks allegedly steered homeowners into high-priced policies offered by the bank's own insurance affiliate or accepted lucrative kickbacks from insurers.
The alleged abuses came to light in a recent American Banker article by Jeff Horwitz that uncovered a range of questionable practices surrounding force-placed coverage, including policy backdating, undisclosed commission arrangements, duplication of in-force home coverage and insuring a home for more than it's worth.
In one cited case, the mortgage servicer allegedly allowed a borrower's $4,000 escrowed insurance to lapse in error, then replaced it with a force-placed policy that cost $33,000. The servicer's cut? At least $7,100, in an industry where servicers averaged about $50 per loan last year, according to the Mortgage Bankers Association.
Horwitz says some lenders, including JPMorgan Chase, have devised a different way to profit from force-placed policies: they reinsure them through their own insurance affiliate.
Just when we thought that every financial scam, con and abuse that helped contribute to the housing bust has been revealed, another one pops up. Unfortunately with this one, the longer America's foreclosures remain in financial purgatory, the more the force-placed insurers and their loan servicing customers stand to gain.
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