A homeowner with a home financed by a mortgage loan is required to maintain a certain level of homeowner's insurance coverage. In most cases, the premiums for the insurance are paid by the mortgage service company with collected escrow funds. Forced place insurance is one way lenders make sure there is insurance coverage on a home.
Homeowners Insurance Requirements
A mortgage contract requires the homeowner to carry a homeowner's insurance policy, primarily to protect the interest of the mortgage lender since a lien on your house backs the value of its loan. If your home was destroyed by fire or storm, the lender would be paid off first and then you would receive the balance of the insurance proceeds. When a lender determines that a homeowner has not maintained insurance coverage on the home, the lender must first attempt to let the homeowner know that insurance coverage must be in place. If the homeowner fails to obtain a policy, the lender can purchase insurance to cover the home and charge the homeowner for the forced place insurance policy.
A forced place insurance policy is usually much more expensive than the coverage a homeowner would buy from an agent or insurance company. During the housing and foreclosure crisis, it was revealed that some mortgage companies abused homeowners with extremely high-priced forced place policies. The lender, in some cases, owned the insurance company or received kickbacks on the expensive policies to generate more profits. In January 2012, regulators from New York state issued subpoenas to more than 20 insurers and mortgage service companies to investigate forced place insurance abuse.
New Federal Regulations
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 addresses lender responsibility concerning forced place insurance. The law requires lenders to make extra efforts to contact homeowners before they buy forced place insurance, and the cost of the insurance must be "bona fide and reasonable." Reuters reported in March 2012 that Fannie Mae, the country's largest mortgage funding source, had issued plans to take more control of what the company calls Lender-Placed Insurance. Under the plan, Fannie Mae would contract for forced place policies instead of the mortgage service companies. Fannie Mae would go to different insurance companies to receive competitive bid prices on forced place coverage.
Avoiding Forced Place Insurance
It's important to keep track of your homeowner's insurance coverage dates and terms. Homeowner's insurance policies renew annually, and just before the renewal date is the ideal time to change coverage or verify that your current company will renew the policy. If you receive an insurance required letter from your mortgage lender, take prompt action to rectify the situation. Even if you know you have coverage in force, contact the mortgage servicer to make sure the lender knows you have coverage. Mortgage service companies can make mistakes and you may have to prove you have current insurance coverage.
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