Forced-Place Insurance Rises On Fed's Radar

NU Online News Service, March 9, 3:34 p.m. EST

The head of the Consumer Financial Protection Bureau will propose regulations this year imposing strict limits on use of force-placed insurance for homeowners’ rising to a place of concern among consumer advocates where it should not be an industry expert says.

In a speech Tuesday to state attorneys general addressing the mortgage crisis, the director of the new federal Consumer Financial Protection Bureau, Richard Cordray, says his agency will issue rules “to prevent (mortgage) servicers from charging for this product unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance.”

As Cordray made his announcement, officials at the Federal National Mortgage Association say it is moving to impose tighter controls on force-placed insurance.

Fannie Mae also took action, saying it would solicit proposals from insurance companies seeking to compete for its force-placed business.

 Industry officials say that if Fannie Mae tightens control over force-placed products, it would be a change from current practices.

Forced-placed insurance, which is homeowners coverage placed when the owner fails to secure it on his or her own, has now risen to the top of the list of concerns consumer advocates and their government supporters have with insurance products, a position Robert Hartwig, president and chief economist at the Insurance Information Institute, says that singling out the product is unfair.

He says the problem is not with insurers, but lenders because each lender manages its own business relationship with force-placed insurance providers.

Benjamin M. Lawsky, New York State Superintendent of Financial Services, says in an interview with National Underwriter that, “As the regulator, we have been conducting a far-reaching investigation since the day we opened the doors as the new Department of Financial Services on Oct. 3.”

He says force-placed insurance “has been and will continue to be one of our top objectives.”

He adds, “We believe our investigation will expose just how bad this problem is; get to the core of why this insurance is so outrageously priced; hold those responsible accountable, and produce real long-term, enforceable solutions.”

According to consumer advocates participating in the NAIC’s Consumer Liaison Committee meeting last Saturday in New Orleans, the market is dominated by two players, QBE, an Australian-based firm which acquired Balboa Insurance from the Bank of America, and Assurant.

Assurant has 65.5 percent of the market; QBE 34.2 percent, according to the data presented at the meeting by consumer representatives.

The product is very expensive, two to four times as expensive as a voluntary market homeowner’s policy, according to Peter Kochenburger, from the University of Connecticut, and Birny Birnbaum, of the Center for Economic Justice in Austin, Texas.

Based on research by Birnbaum, the market has soared in recent years, growing from $1.49 billion in 2004 to $5.57 billion in 2010. Birnbaum says his data indicates that over that period, the loss ratio has dropped from 33.1 percent to 24.3 percent.

But Hartwig contends it is unfair to pillory the business. He says force-placed insurance “is more expensive because the insurer by prior arrangement with banks, agrees to insure these homes sight unseen and instantly.” That is different from the way insurance is normally sold, says Hartwig, when the risk is examined and underwritten. “Obviously, that increases the risk. Many factors are involved in homes involved in foreclosure procedures and that also increases risk.”

Because force-placed insurance is associated with the foreclosure process, Hartwig says the home “could be abandoned; subject to vandalism, or theft of copper pipes, or heating and air conditioning units; and, there could be other issues, such as fire or water damage; or frozen pipes stemming from neglect, as well as fire.

“The threat of all of these is greatly enhanced in homes that are being foreclosed upon,” he says.

Hartwig also notes that, “If people don’t want a force-placed policy, they have the option of reinstating their standard existing policy. The only reason it exists is that people stop paying their homeowners insurance, leaving the bank in the position of paying for the loss.” 

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