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Facts about force-placed insurance

There's been a lot of misinformation about “force-placed insurance” lately, and it's disturbing to banks who are being accused of doing something that's anti-consumer. Let's look at the facts.

First, relative to the number of mortgages in America, very few borrowers – only around 2 percent – find themselves facing lender-placement of their homeowner's insurance.

Moreover, when getting a loan for a home, every borrower has the responsibility – as detailed in the mortgage contract – to insure his home while it is pledged as collateral. When a borrower fails to pay his homeowners insurance, the bank will find the necessary coverage and require the borrower to pay the premiums until the borrower can find his or her own replacement coverage.

The duty to protect the collateral for any loan falls first to the borrower. It becomes the bank's problem only when the borrower allows the coverage to lapse. Homeowners voluntarily shoulder this responsibility in exchange for receiving a loan.

  • Lender-placement is a preventable circumstance. As long as homeowners observe the terms of their loans and pay their homeowners premiums, they avoid lender-placed insurance. It's also curable; if their coverage lapses, they can replace it and the bank will terminate the policy it has put in place to protect the collateral.
  • Banks are required to maintain continuous coverage. A variety of directives – from bank examiners to underwriting standards imposed by Fannie Mae and Freddie Mac – require banks to maintain continuous coverage, have the lender place coverage in case of a lapse and charge borrowers the premiums.
  • Mortgage markets cannot function if the collateral used to secure a loan is left uninsured. Lender-placed insurance ensures the actions of a small number of borrowers don't adversely affect all borrowers. Continuous coverage protects investors in mortgage-backed securities.
  • These policies are issued without the benefit of individual underwriting. Unlike voluntary coverage, the insurer agrees to issue a hazard policy without knowing the details of either the structure or the owner of it. Because of these unknowns, these policies are more expensive than the original homeowner's coverage the borrower allowed to lapse.
  • Banks are required to warn borrowers when their coverage has lapsed. Banks must observe notice requirements when presented with evidence of lapse. Most banks make multiple attempts to reach the borrower, both by mail and by phone.
  • Homeowners also benefit from lender-placed insurance. If the home is destroyed and there is no insurance coverage, the homeowner will still owe the outstanding debt and will have lost a major asset. Lender-placed coverage protects the homeowner from this risk.

Thanks to Kevin McKechnie and the American Bankers Insurance Association for providing us with the foregoing highlights dealing with “force-placed” insurance.

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