Underwater mortgages and foreclosures are a blight to Nevada, forcing many people to file Las Vegas bankruptcy. One thing that might be worsening these problems is how homeowner’s insurance works in the United States. Generally, homeowner’s are obligated to buy insurance for their properties. However, lenders have an interest in ensuring that the property’s insurance doesn’t lapse in case there’s an incident that damages it. If that occurs, like a hurricane, flood, storm, etc. then there is no payout and if the homeowner moves on, the bank must resell the property for even less than what it is worth. Consequently, banks will often buy insurance on properties once the policies lapse or the homeowner stops making payments, and then they charge the homeowner. This is called “forced-place insurance.” From there, though, things start getting weird. Here are five things to know about it:
- Banks have no incentive to choose the cheapest or most appropriate policy for the property. The bank advances the cost of the insurance premium to the insurance company and then it receives a commission from the insurer as a kickback. Both of these costs are then passed on to the homeowner, whether they can pay it or not.
- Sometimes banks have their subsidiaries reinsure the properties, which gives them more profits and a greater incentive to not pay out a claim. As a result, the “loss ratios” on forced-place insurance plans are usually significantly higher than the actual losses incurred. For every 55¢ on the dollar of insurance purchased only 20¢ have actually been incurred, meaning homeowners and investors were overcharged for the insurance policies.
- One way banks end up buying forced-placed insurance is by arranging for the homeowner to make the mortgage payments in an escrow account operated by a mortgage servicer. Because the insurance is paid by a middleman that has every incentive to miss payments, even if there’s a small shortfall by the homeowner, the servicer often does so and buys forced-place insurance instead.
- Another trick forced-place insurance uses is back-dating the policies. For example, a homeowner might be forced to pay for a policy that protects them from a storm over the previous year even if the property suffered no damage from a storm.
- The 2010 Dodd-Frank financial regulation act requires that forced-place insurance plans be “bona fide and reasonable,” but how that is to be enforced isn’t defined. Consequently, Bloomberg published a lengthy article on forced-place insurance in 2012.
The bottom line is that the best way to avoid a forced-place insurance scheme is by making the homeowner’s insurance payments yourself. Otherwise, the costs that are extended to you might push you into foreclosure. If that happens, you need an experienced Las Vegas bankruptcy lawyer who’s got your back.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.