Justice Watch: Forced-Place Insurance Policies May Soon Be Tamed

, Daily Business Review


Robert M. Siegel
Robert M. Siegel.

Call it fear of litigation or a public relations stunt.

Either way, Fannie Mae and Freddie Mac aim to end the party for banks and insurances companies accused of gouging tens of thousands of homeowners, mostly in Florida, on expensive forced-placed insurance policies.

The Federal Housing Finance Agency directed Fannie Mae and Freddie Mac last month to prohibit mortgage servicers from being reimbursed for expenses associated with captive reinsurance arrangements.

The move is a victory in an ongoing consumer fight to take the profit incentive—commissions paid by insurers to lenders—out of policies forced on owners who don't show proof of homeowner insurance.

When policies lapse, lienholders can go out and buy insurance. However, lenders and insurance companies were replacing policies on behalf of the borrowers at prices up to 10 times more than in the open market.

Florida is ground zero for forced-place insurance, accounting for more than 30 percent of all of policies sold nationwide. The state also leads the nation in class-action lawsuits against banks to end forced-place insurance and follows only California in mortgages backed by the government-sponsored enterprises.

"The problem with force-place insurance on residences in Florida, as you know, is very widespread, and Fannie Mae and Freddie Mac are big investors," said Robert M. Siegel, a bankruptcy and tax partner at Bilzin Sumberg Baena Price & Axelrod in Miami.

Coral Gables attorney Adam Moskowitz, a partner at Kozyak Tropin & Throckmorton with six national forced-placed class actions pending in Miami federal court, said Fannie and Freddie were being hit with a lot of these fees on the policies in foreclosures.

"They were paying a lot of these excess fees. If you get foreclosed upon and they guaranteed your mortgage, they have been paying these excess fees, and they have had enough," he said.

Mounting Concerns

Siegel, who writes the Mortgage Crisis Watch blog with Bilzin associate Anthony Narula, said the rule change came because of mounting concerns that the insurance practice exposed Fannie Mae and Freddie Mac to potential litigation. Another concern was the forced-placed insurance would further tarnish the secondary mortgage buyers' reputation with consumers—a reputation left in tatters from the 2008 collapse of the housing market.

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