Losses from Force-Placed Insurance Are Beginning to Rankle Investors
Evidence of abuses and self-dealing in force-placed insurance suggests there may be far larger problems in how servicers are handling home loans than sloppy document recording.November 9
Before servicers force-place insurance, they often warn homeowners that the policy is costly, offers poor coverage and is likely to benefit the servicer. The investors who often end up paying for that same policy don't benefit from the same notice.
They may be catching on all the same. Recent rumblings suggest mortgage investors may soon begin to challenge widespread servicing practices related to force-placed insurance.
Inattentiveness to servicing minutiae cost investors little during the housing boom, when rising property values allowed servicers to charge borrowers high delinquency-related fees while still recouping investors' full principal through refinancings and foreclosure sales.
But the torrent of borrower defaults after the bubble burst has changed the stakes. Because servicers repay themselves for the cost of force-placed insurance with part of the proceeds of foreclosure sales, investors end up paying for the pricey policies through greater loss severities.
At a mortgage backed security investor conference last month, Amherst Securities analyst Laurie Goodman argued that Bank of America's ownership of a force-placed insurer, Balboa Insurance, had contributed to the bank's torpor in clearing out hopelessly delinquent loans. The delay added up to taking money from investors' pockets, she said. "Bank of America force-places insurance at a much higher rate than market rate," Goodman told a crowd composed largely of investors. "It would make sense that [it] would be much slower to liquidate, and in fact they are."
Force-placed insurance is one of numerous areas in which investor and homeowner interests are aligned, said Talcott Franklin, a Dallas attorney representing MBS investors who have joined together in an attempt to promote their interests.
"Both borrowers and the investors are the customers of the servicers," he said, adding that he'd like to see more collaboration between the two groups. "In what other industry do companies treat the customers in this manner?"
Litigation is one possible avenue to challenge servicer-placed insurance arrangements, though that would require overcoming significant procedural hurdles. An easier route would be if Fannie Mae and Freddie Mac were to take an interest in the practices and the costs to their portfolios. As owners or guarantors of 53% of the country's more than $10 trillion mortgage market, the two government-sponsored enterprises have wide latitude to set industry practices.
Neither Fannie nor Freddie would comment. A spokeswoman for the Federal Housing Finance Agency, the conservator for both, said: "Fannie and Freddie are actively investigating ways to reduce the costs associated with force-placed insurance."