You and your mortgage can be in grave financial peril in this era of sick mortgage companies and bad loans.
You can hardly go a day without hearing news that another mortgage lender is teetering on the edge of bankruptcy. That’s bad, surely, for the company and its stockholders. But most people don’t know how dangerous it is for them when mortgage companies buy and sell portfolios of mortgages, or when companies are bought by other companies.
This blog post is an excerpt from Chapter Three of my book, “Insurance Claim Secrets REVEALED!”
There is an extremely important strategy for you, the homeowner, in this chapter.
It is really important that you read this chapter all the way through. If you have your homeowners insurance premium paid by your lender out of an escrow account, THIS STORY WILL SHOCK YOU. IF YOU ARE NOT VERY CAREFUL, YOU COULD END UP WITH NO COVERAGE ON YOUR HOUSE. Or, you could end up with inferior coverage at four times the price…without your consent!!
Please read on…it’s going to take a little work to get to the shocking part. Hang with me.
In the last chapter I told you how I worked for a couple years as a claims examiner at the home office of an insurance company. But it was not just a normal property insurance company. This company sells hazard insurance to mortgage companies and banks in the United States. Let’s call this company…”ABC.” (That’s not its real name, nor is it the initials for its real name.)
You or I could not buy one of these policies, even if we wanted to. Why? Because ABC’s customers are the mortgage lenders.
A lot of people who have a mortgage have an escrow account with their lender. Part of each monthly mortgage payment goes into that escrow account to pay for insurance and/or property taxes. Escrow accounts are very popular with homeowners because the bank becomes responsible for paying the premium to the insurance company, and paying the property tax bill to the county. The borrower writes one check per month, and forgets about it.
But there are a lot of problems with escrow accounts.
Sometimes, the mortgage companies sell their mortgages in big portfolios to other lenders. When that happens, the buyer gets all of that escrow money, too. In the confusion surrounding the sale of those mortgages, and the time it takes to do the deal, the buyer sometimes fails to make premium payments on time. When that happens, some policies occasionally get cancelled.
Sometimes, people don’t automatically renew their policies that are in escrow, and the policies cancel.
Sometimes, insurance companies cancel homeowner policies, and the borrower doesn’t tell the lender, or replace the coverage in a timely manner. Sometimes, the insurance companies send the cancellation notices only to the lender, and the homeowner never knows his policy was cancelled.
Sometimes, lenders just screw up and forget to make premium payments…even when the money is in the escrow account and it’s no fault of the homeowner. And sometimes the lenders fail to notify the homeowner that they have no insurance. The homeowner finds out when they have a claim.
Banks and mortgage lenders have to deal with large numbers of foreclosed properties and repossessed properties, also known as REO (Real Estate Owned) properties. The borrower defaults on his loan, and there’s no one to pay the insurance premium, and the policy gets cancelled. I’ll come back to this in a minute.
In each of these examples, the home ends up without insurance coverage. Banks and mortgage companies do not like having loans on properties without insurance. If the house burns down, so does their equity.
ABC to the rescue!!!
ABC makes a deal with the banks and mortgage companies that it will write a policy from the date of cancellation of the borrower’s coverage, and into the future…as long as a premium is paid. ABC takes all these properties sight unseen, with no underwriting. Most of the time, ABC actually back-dates the policy to the date when the other policy cancelled…even after a claim is filed.
You can imagine that this is very high risk business for ABC. They don’t get a chance to look at any house, no matter if it’s a mansion on the hill, or a “crack house” in the worst part of a major city. ABC accepts them all. But, because they accept this high risk business, they charge premiums that are two…three…four times as much as a standard premium.
ABC has a remarkably low loss ratio, and makes enormous profits on this line of business.
So, if you are a homeowner, and your policy gets cancelled for any reason, the bank will pay the premium for you and charge it to your escrow account. Did your house payment suddenly go up? Your monthly house payment likely went up a lot to pay for the new insurance.
The BIG problem…the HUGE problem for YOU…the homeowner…is that the bank only cares about THEIR MONEY. They don’t care about you, the contents of your home, your legal liability, or where you’ll live if you have a fire and can’t live in that house. They usually only write the policy for the unpaid balance of the loan.
Lenders don’t care about the replacement cost of your property. Forced-placed coverage usually only covers the outstanding loan balance on your mortgage. So, if you had a house worth $150,000.00, and a loan balance of $50,000.00, the lender would buy a policy for $50,000. The lender only cares about getting the loan paid off.
What if your house is worth $150,000.00, and your loan balance was only $50,000, and you have a total loss fire with their coverage?
You are going to have a very bad, life-changing experience, that’s what!!
Normally, your property insurance covers your liability. Lenders don’t care about your liability exposure. They don’t care if a delivery man falls on your property and sues you for six figures. Forced-placed coverage only covers the outstanding loan balance on your mortgage. There is no liability coverage.
Normally, your property insurance covers your contents…your personal property, like your furniture and other belongings. Lenders do not care about your contents. They don’t care if everything you own is destroyed. Forced-placed coverage only covers the outstanding loan balance on your mortgage. There is no contents coverage.
Normally, when a homeowner buys insurance to protect his home and contents, the policy also has coverage for Additional Living Expenses. Lenders do not care if you are forced out of your home because something happens that makes your home unfit to live in. Lenders don’t care if you have to live temporarily in a homeless shelter. Forced placed coverage only covers the outstanding loan balance on your mortgage. There is no ALE coverage.
Also remember that the LENDER owns the forced-placed policy on your property, not you. The settlement checks will go to them, or perhaps made payable to the lender and you. But they usually won’t let you cash the check.
Are you still with me?
There is an extremely important strategy for you, the homeowner, in the rest of this chapter.
When I worked for that Atlanta insurance company, I regularly talked to people who said that the first time they were aware of the forced placed policy is when they filed a claim. Their old insurance company sent the premium notice to the lender, who missed the premium due date, and the policy cancelled. The lender then forced placed a policy on the property.
So, what do you do if this happens to YOU?
One of these scenarios will explain your situation:
1. You were negligent, and allowed your policy to lapse. It’s not the lender’s fault. The insurance company notifies the lender of the cancellation date. The lender forced-placed a policy for the loan balance. You have a claim.
What do you do? Very carefully follow the steps in this book to take control of your claim. Then, as soon as the claim is completed, buy your own policy and cancel the one the lender owns. Just make sure that you have coverage IN PLACE before you cancel the lender’s policy.
2. The lender was negligent, and allowed your policy to lapse. Then, the lender force-placed a policy for the loan balance. You have a claim.
What do you do? ALERT!!!! Get an attorney involved IMMEDIATELY!! Don’t wait!! Don’t try to be a nice guy!!
Get your documentation in order. Make sure that you can prove it was the lender’s fault that the premium was not paid. Next, have your attorney call the person at the lender who manages the Escrow Department. Explain what happened, and ask them what they plan to do to make things right. If they fix the problem and you don’t suffer any loss from their negligence, then all will be well.
How does the lender fix the problem THEY created?
The bank could contact your insurance company and accept liability. Many times, the insurance company will allow the bank to make the premium payment and reinstate the policy. Once that’s completed, you can proceed with your claim based upon the insurance policy that you did have before the cancellation.
The lender could accept liability and pay your claim out of their own pocket. You’ll usually see donkeys flying around outside your house right before this happens.
If the insurance company will not allow the policy to be reinstated, then you must seek damages from the lender itself. Your attorney must file a lawsuit against the lender.
Watch this carefully!!
1. If you have an escrow account through your mortgage lender, make sure that your homeowners insurance policy is in force at all times.
2. Call your homeowners insurance company, and make sure that they are sending renewal notices and premium notices to you, not just your mortgage company. Too many mistakes happen too frequently to trust your mortgage lender to take care of your business.
Remember earlier in the chapter I said that hazard insurance rarely has coverage for Contents, Additional Living Expenses (ALE), or Liability? If you have a fire, and your house is full of personal property, it’s worth tens of thousands. If you have a fire, and can’t live in your house for a few months, ALE coverage can mean the difference in staying at a homeless shelter, and some of your kids staying somewhere else, or keeping the family together in a short term rental apartment or house. Again, tens of thousands of dollars that you should be able to collect.
If a delivery man falls on your sidewalk and is injured….and you’re liable… his lawsuit for damages could easily run into six figures. Hazard insurance doesn’t cover liability.
So, you cannot afford to place all your assets and your property at risk by trusting someone else to handle your money for you. You cannot just pay your monthly mortgage payment and forget it.
The strategy is to make CERTAIN that your escrow account keeps your Homeowners insurance policy in force AT ALL TIMES!
This strategy ALONE could save you, the homeowner, hundreds, perhaps many thousands of dollars of insurance benefits.
Final, final thoughts! Your mortgage contract probably states that the mortgage company will replace your coverage in the event of the cancellation of your insurance coverage. However, if the mortgage company force-places an inferior policy, a true “replacement” of coverage has not occurred. Point this out to your attorney. You might have a very compelling cause of action against the mortgage company!!