Profile: mark warshal
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Small typo in the following sentence. Replace “loan” with “property”
It is often the case that forced placed insurance is much cheaper than the cost of a full blown HO Ins policy, particularly with small balance loans where the servicer only needs to protect its interest in the property, not the full value of the property.
Here’s some real world questions for your real world example:
1) How are you writing the policy? If you’re the one writing it, does that mean you’re underwriting it? If you are, then you’re self insuring, and you’re actually not serving your own “needs” since you’d be the one paying out the insurance. That makes no sense.
2) 99.99% of the time it has been proven beyond any shadow of any doubt that the force placed policies are overpriced and unnecessary. You’re going to be paying the premium one way or the other. If you want to call the insurance company to cancel some of the coverages or add the insurance cost to the borrower’s loan, that’s the purpose of an escrow account, and if they default, you’re insured against… more »
3) in every case, it is always cheaper and better for everyone involved to have the preferred voluntary policy continued rather than placing a force-placed policy. You’re not being forced out of anything. « less
Welcome to Regulation Room, mark warshal, and thank you for sharing your experience. Your point seems to be that force-placed insurance can be cheaper for the servicer than homeowner’s insurance.
Is this usually the case, or does it come up when a substantial part of the mortgage has been paid down? If it comes up when the mortgage has been paid down, in your experience, roughly how much of the mortgage needs to be paid for the force-placed insurance to be cheaper than the homeowner’s policy? Also, do you think there would be a difference if the lender and servicer were two separate businesses (rather than, like in your case, having the owner and servicer be the same)?
CFPB’s alternative proposal would allow a servicer to use force-placed insurance, but only if it… more »
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The proposed rule requires that the mortgage servicer continue to pay the homeowner’s insurance (HO Ins) from the escrow account even if the customer is in default on the loan. This places an undue burden on the mortgage servicer. It is often the case that forced placed insurance is much cheaper than the cost of a full blown HO Ins policy, particularly with small balance loans where the servicer only needs to protect its interest in the property, not the full value of the loan. If a customer is in default and has not made payment for many months (often times years), the home owner is being unduly enriched and the mortgage servicer is being harmed by having to payout much more than it otherwise would have to to protect its interest in the property. The commentary suggests that the… more »
Small typo in the following sentence. Replace “loan” with “property”
It is often the case that forced placed insurance is much cheaper than the cost of a full blown HO Ins policy, particularly with small balance loans where the servicer only needs to protect its interest in the property, not the full value of the property.
Here is a real world example which will illustrate why this proposed rule is unfair.
I am a mortgage originator and loan servicer. I hold all the loans I make.
I have a customer who has stopped making payments on his account. He is 6 months past due on his loan and has refused to make contact with us. He is in foreclosure. I escrow for his taxes and his insurance. He has a large shortage in his escrow account. His homeowner’s renewal is due on October 23, 2012. The renewal premium is $1,398.00.
The proposed rule would require that I pay his insurance premium from his escrow account even though he does not have enough money in his escrow account to cover the premium.
I can write forced placed insurance to cover my interest in his property for $460. Yes, the insurance… more »
Here are the steps I have taken to deal fairly and completely with this customer.
1. I have informed him by mail that
(a) I will no longer be escrowing for his homeowner’s insurance.
(b) His policy will be renewing on October 23, 2012.
(c) He needs to contact his agent to make an arrangement for payment on the policy.
(d) as long as he keeps the policy in force, we will not issue forced placed fire insurance.
(e) if he allows his insurance to cancel we will write a forced placed policy providing coverage to protect my interest in the property at a cost of $460.00.
(f) if forced placed insurance is required, he will be responsible for paying this cost.
(g) the forced placed policy is for my benefit only and is insufficient for his needs.
2. I have redone his escrow analysis and reduced his monthly tax escrow payment.
The steps I have taken seem perfectly fair and reasonable.
This proposed rule implies that even if the borrower has stopped paying the loan, I as the mortgage holder and loan servicer have a responsibility to protect the borrower, no matter how much money it will cost me. In today’s world it could take years to finally take back a property. This rule would require me to pay the borrower’s policy premium for 2, 3 or even 4 years, even though I could protect my interest in his property for 1/3 the cost.
Of course, at any time, the borrower can call the insurance agent, cancel the policy and receive the refund, a refund of my money, not his. Asking me to pay his premium monthly instead of yearly is a ridiculous alternative, in my estimation.
The borrower is being unfairly enriched at the expense of the mortgage holder. This is not the way the our American system is designed to function. When are individuals going to be held accountable for their actions or inactions?
I know that the public is angry and wants to make Wells Fargo and Bank of America pay for everything, as retribution for the mortgage meltdown. But small mortgage holders like myself are being forced to pay for the sins of others. The rule is unfair to me and is simply wrong, based upon how our American system of economics functions.
I strongly recommend that the CFPB rethink its rule and implement a new rule which requires the mortgage servicer to inform the borrower of the situation and give the borrower the opportunity to take responsibility for himself, as I have outlined above.
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Should the late charge be included as part of what is considered a full monthly payment?
The answer to this question needs to be guided by the long history of contract law in America. If the customer makes his payment after the grace period has expired, then the customer is contractually obligated to pay the late charge. So the answer is yes, the customer must pay the late charge before the monthly payment is to be considered fully paid.
The CFPB should not be issuing a rule which over-rides a legal contractual obligation of the borrower to the lender.
Excluding the late charge is arbitrary and not based on any solid legal foundation. It just feels good. The rule could just as well exclude the principal portion of the payment and include only the past due interest. Why not? Excluding… more »
Please make rules which are based on the legal contractual obligation between the borrower and the lender, not based upon a feel good approach that views lenders and loan servicers as evil and borrowers as angels that are never in the wrong and have no responsibilities to live up to. « less
Answers to your questions.
1. It is a Lloyds of London policy written through SWBC. The cost is $1.50 per $100 of coverage plus 3% tax. We are absolutely not self-insuring. Also, there is absolutely no add-on costs. I charge the customer exactly what SWBC charges me.
2.The renewal cost of the current HO Ins policy is $1,340.00. A very expensive HO Ins policy. I can protect my interest for only $463.50. I am the owner of the note. It is my money that I am paying out. No one is insuring me against a loss. The customer has insufficient funds in his escrow account to cover the cost of his HO Ins policy, nor the forced fire policy I potentially have to place.
3. I agree it is better for the customer to have his own insurance. He has stopped paying my loan, but he absolutely… more »
You seem to have a very strong point of view. Kindly explain to me your rational for why I have to risk more of my own money, paying a very expensive HO Ins policy, for a customer who is no longer paying me, when I can protect my interest in the property for 1/3 as much. « less
I do not seem to be able to reply to Moderator’s post, so I will start a new comment here. This post is in reply to Moderator’s reply to my previous post.
There are several points I am trying to make.
1. Yes, it is often the case that forced insurance is cheaper than regular insurance.
2. It has always been the case that money held in escrow to pay for taxes and insurance was an expense that was prepaid by the borrower. RESPA is filled with rules on how to calculate escrow deposits and make sure that the buffer is no more than 2 month’s worth of payments. If a borrower is in default on his loan, there is insufficient funds in his escrow to pay his insurance. I will always continue paying the taxes because taxes are a priority lien. But the insurance is nothing but… more »
Now, to answer your questions.
1. There are a lot of variables which determine the cost of the HO Ins policy. Credit history and property location are probably the two most important. $100,000 of forced placed insurance would cost, through my provider, $1,545.00. A HO Ins policy through a traditional carrier with dwelling coverage of $200,000.00 could cost, based upon my experiences, between $600 and $2,000. But I deal with smaller balance loans of 10K to 30K, where the cost of the forced placed policy is almost always less than the HO Ins premium.
So, there is no simple formula that we can use to say that when the mortgage is paid down by X percent, forced insurance will be less expensive than traditional coverage.
2. Although I would happily accept an exception for mortgagees who service their own loans (which I am), I think the rule should be based on a solid principal. As the rule stands now, someone — either the servicer or the note owner — is being required to pay out more money than it has to in order to protect its interest in the property. Just because the servicer is different from the note owner really should not make a difference. Someone is being forced to potentially lose more money than necessary.
In my opinion, if the borrower in default is properly notified that his HO Ins policy will no longer be escrowed, and if the borrower in default fails in his responsibility to keep the policy in force, then I believe the mortgagee or the servicer should be free to place a forced policy to protect its interest.
As we have discussed previously, if I pay the customer’s premium on his HO Ins policy, he can cancel the policy and receive the refund. Asking me to pay the HO Ins policy for a borrower in default in monthly installments seems to me to be a tremendous additional burden.
Additionally, why should I as the mortgagee be required to pay for the defaulted borrower’s liability coverage and personal property coverage? This may sound harsh, but when I make someone a loan, I don’t want to become his surrogate mother who has to pay his bills when he can’t or won’t.
3. The CFPB’s alternative proposal is certainly more appealing than the existing proposed rule. In my situation, the forced placed policy will most likely cost less than the HO Ins policy. So, I can accept it for sure, but I don’t think it is based on a sound principal.
As a drawback to the alternative rule, I do see some litigation issues. If I choose forced insurance over the defaulted borrower’s HO Ins policy, and there is a loss, some heavy litigation could result. But overall, I absolutely prefer the alternative proposal.
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