Abuzz Over Force-Placed Insurance

American Banker's story examining mortgage servicers' force-placed insurance practices ["Ties to Insurers Could Land Mortgage Servicers in More Trouble," published online Nov. 9] generated an unusually high volume of feedback from readers and in the blogosphere, ranging from laudatory to livid. Some suggested our story — which detailed potential conflicts of interest created by servicers' arrangements with insurers, and argued that the high cost of this type of insurance hurts mortgage investors as well as homeowners — was one-sided. But many more praised the depth of the reporting on a previously little-discussed wrinkle of the foreclosure crisis. 
Two letters to the editor defended the legitimacy of force-placed insurance. "Based on actual losses paid, the enormous amount of administration, regulation, and borrower disclosure required, the product itself is far from overpriced and is highly regulated," wrote Skip Davis of the Plateau Group (which markets such insurance). "The borrowers and investors scream just as loudly if the lender does not maintain proper coverage on their collateral when a natural disaster hits."
David Merkel of Aleph Investments — who was careful to disclose that he is a shareholder in Assurant, one of the force-placed insurers mentioned in the story —  wrote that "most force-placed homeowners policies are only in effect for several months" because "people have an incentive to go and get a regular policy after that.” And while he agreed that if there’s “any sort of long backdating, that’s an abuse that needs to be corrected," he added that given the "competitive dynamics of this industry, it would be impossible for a force-placed insurer to do business without compensating the mortgage servicer."
Blogger Felix Salmon of Reuters called the story "a spectacular piece of reporting … about goings-on in an obscure corner of the mortgage-servicing world." J.J. Hornblass of BankInnovation.net was similarly effusive: "If you read one article today, read this one." And the Bank Lawyer’s Blog said the practices described in the story could be "a scandal in the making. … Sometimes it takes a financial disaster to uncover the worst facets of a business that were covered up and let slide when real estate values were rising like a Dallas socialite’s hairdo. I can’t believe this is the last piece we’re going to read on this subject."