How would you like it if your lender forced a hazard insurance policy on you even if you were already covered? It happens, and now the feds' Consumer Finance Protection Bureau is asking consumers, through Oct. 9, 2012, whether homeowners deserve better treatment.
It's great to see the CFPB doing what the federal government is supposed to do -- standing up for consumers by proposing a rule that would force mortgage lenders to treat homeowners fairly when they force them to buy homeowners, flood or even wind insurance.
When you buy a house with a mortgage (learn more about mortgages here), you promise to keep the house insured against whatever disasters befall your home -- by buying a homeowners insurance policy and possibly wind or flood insurance, too. If you don't (or can't) get that insurance, the lender has the right to buy its own policy (known as force-placed insurance) and pass along the cost to you.
But troubles arise because not only do lenders not get a very good deal (these policies cost more and cover less than the insurance you buy yourself), they sometimes buy policies for homeowners who don't need them.
The CFPB proposal rightly insists that before a lender can hit you with a sky-high priced insurance policy, it must:
• Give you at least two notices telling you to go get your own insurance before it buys a policy for you. One notice would be required at least 45 days before charging for force-place insurance coverage, and a second notice would be required no earlier than 30 days after the first.
• Warn you about how much the lender's policy is going to cost you.
When the lender does get a policy for you, the CFPB says two other rules should apply:
• The lender ought to refund your money if it charges you for an insurance policy that you didn't need because you really did have your own policy.
• If your lender includes insurance policy costs in your escrow, but there's not enough money in escrow when the renewal bill comes, the lender will have to pay for the policy anyway and then raise your escrow payment to cover the cost correctly.
Why Might I Be Slapped With Force-Placed Insurance?
Just because your lender hasn't force-placed an insurance policy on you in the past is no reason to think it won't do so in the future. You could find yourself with an expensive, force-placed policy if:
• You do something that causes your own insurance company to cancel your homeowners policy (say you file a fraudulent claim).
• Insurance companies stop offering policies in your area and you can't find replacement coverage.
Basically, any time your insurance lapses, you can be force-placed because you promised not to let it lapse.
The Problems With Force-Placed Insurance
On the surface, the idea of force-placed insurance is fair and reasonable. If you don't have a homeowners policy and your home burns down, you probably won't have enough cash in the bank to pay off your mortgage. And there won't be a home for the lender to foreclose on and sell to get its money back. So it's reasonable to require you to live up to your promise to insure the property.
Below the surface, though, there are issues:
• Lenders collect payments from the insurance company providing the force-placed policies. That's a conflict of interest since it incents them to go with the company offering the highest referral fee versus the one offering the best value to homeowners.
• Sometimes the lender makes a mistake and says you don't have a homeowners policy when you do. If you call to get this mistake corrected, you likely end up talking to someone at the insurance company, not the lender's office. If you do have insurance, the force-placed insurance company loses a customer, so the person you're talking to at the force-placed insurance company has no incentive to fix the error.
• Force-placed can apply to flood insurance, too. Your property can be in a flood zone even though your home isn't. That happens when the flood zone covers only part of your property - the part your home isn't on. Convincing the insurance company person that this is the case can be challenging.
• Sometimes insurance companies pull out of markets. Florida, for example, had to set up a state wind insurance fund because homeowners were unable to get coverage after big hurricane losses there. Between the time the insurance companies pulled the plug and the state set up the wind insurance pool, homeowners couldn't get coverage and were force-placed by their mortgage companies.
The federal government is sticking up for consumers, and consumer groups will support the proposal. But if you think the practice by lenders is unfair, let the feds know you support the proposed rule.
Lenders' Force-Placed Insurance Policies Cost Homeowners More
As we gear up for the height of the hurricane season (also a time when tornados, wildfires and floods are common), we're taking a look back at some of the worst natural disasters in recent memory and how they reshaped the affected regions. Entire towns have been wiped off the map, and you'll be as shocked as we were to see the before and after shots of areas that have been hardest-hit by storms and other natural phenomena.
When: April 27, 2011
Cost of damage: $2.2 billion
The powerful EF4 tornado that hit the quiet town of Tuscaloosa, Ala., was one of 358 that tore across the Midwest from April 25-28 in 2011 -- the largest tornado outbreak in U.S. history. The rows of suburban houses that you see here were suddenly blown away.
When: May 22, 2011
Cost of damage: $2.8 billion
The quaint town of Joplin was nearly wiped off the map when an EF5 tornado struck. About 2,000 buildings were destroyed in the storm, which reached sustained winds of over 200 mph. It beat the Tuscaloosa tornado to become the costliest twister in U.S. history.
The tornado grew to a width of over 1 mile as it made its way through the southern part of Joplin.
This Joplin neighborhood was rendered unrecognizable after the tornado hit.
But it returned to some semblance of normalcy a year later, after ongoing recovery efforts to rebuild.
When: December 2010-January 2011
Cost of damage: $30+ billion
Brisbane, the capitol city of Queensland in Australia, was one of the most affected areas in a massive flood that began in December 2010. Half of Queensland, which is more than 715,000 square miles large, was affected.
At least 70 towns and over 200,000 people were affected by the rising waters. In Brisbane, residents of 2,100 streets were ordered to evacuate. The flood waters peaked at 14.6 feet, the 10th highest in the city's history.
Date: August 23-30, 2005
Cost of damage: $108 billion
The Superdome arena in New Orleans became one of the most well-known symbols of the storm's devastation when Hurricane Katrina rolled through the area. Katrina was the most destructive hurricane in U.S. history and the deadliest since 1928. The Category 3 hurricane caused New Orleans' levee system to fail, sending floodwater into 80 percent of the city. This is the Superdome before the storm.
After Katrina, the Superdome was used to house 26,000 people who were unable to evacuate the city before the storm. The National Guard delivered truckloads of food and water for the evacuees. After the storm, it took $185 million to repair and refurbish the stadium, which was reopened in 2006 in time for the New Orleans Saints' opening game of the season.
New Orleans was a majestic city before Katrina struck.
But much of the city became submerged after its levees crumbled under Katrina's force.
When: January 12, 2010
Cost of Damage: Estimated $14 billion
Casualties: 316,000 (Haiti government estimate)
The National Palace in Haiti's capitol of Port-au-Prince was a beautiful property where the Haitian president lived. But its beauty crumbled under a devastating magnitude-7.0 earthquake -- one of the deadliest in history. In addition to the horrific number of deaths, the earthquake injured 300,000 people, and 1 million people lost their homes.
The National Palace was reduced to rubble after the earthquake. The Haitian government estimated that the quake damaged 250,000 residences and 30,000 commercial buildings. Even six months after the earthquake, as much as 98 percent of the rubble remained uncleared. By May 2010, enough money had been raised worldwide to give each displaced family $37,000.
In January 2012, it was reported that 500,000 Haitians still remained homeless.
When: March 11, 2011
Cost of damage: $235 billion (World Bank estimate)
Casualties: 15,861 confirmed by Japan's National Police Agency
The Sendai region of Japan was almost wiped off the map when a 9.0-magnitude earthquake rocked the country. A nuclear reactor was crippled by the quake and went into meltdown, causing a radioactive catastrophe.
The National Police Agency reported that 129,225 buildings completely collapsed in the quake; 254,204 "half collapsed"; and 691,766 were partly damaged.
The city of Natori before the earthquake ...
... and after, nearly completely destroyed.
When: August 2011
Cost of damage: Estimated $15.6 billion
Casualties: At least 44
Bill Stinson's family ranch, a waterfront property in Nags Head, N.C., became an iconic image related to Hurricane Irene's destruction. The storm made nine landfalls, starting in the Caribbean and making its way up the East Coast to New York City. The flooding that Irene caused was widespread, leading it to become the sixth-costliest hurricane in U.S. history.
Stinson's home, which he shared with his wife, Sandra, and daughter, Erin, was completely blown away by Irene, leaving nothing behind but the staircase. The home had been in his family since 1963. Sandra had told North Carolina's Our State magazine in 2010: "God has really protected it [the home]. ... We have had so many storms, and really, inside, we've only had damage one time since Billy's family has owned it."
The town of Rodanthe before Irene's wrath ...
... and what remained after the storm.
When: September 2008
Cost of damage: Estimated $29.6 billion
Casualties: At least 195
After slamming into Cuba as a Category 4 hurricane, Ike moved along the Gulf of Mexico, devastating areas from the Louisiana coast all the way to Kenedy County, Texas, near Corpus Christi. Crystal Beach, Texas, was hit particularly hard. This is what the waterfront town looked like before the storm.
The town was devastated, with most coastline properties wiped away.
When: Feb. 22, 2011
Cost of damage: Estimated at around $23 billion
The Cathedral of the Blessed Sacrament in Christchurch was considered the finest renaissance-style building in New Zealand. But all that changed when a 6.3-magnitude earthquake struck the region. Damage to Christchurch was extensive, primarily because another earthquake that had struck six months earlier had already weakened many of the city's structures. This is the cathedral before the earthquake ...
... and following the disaster. The two bell towers collapsed in the quake, and the building's dome was destabilized. The dome was eventually removed. It is yet to be determined whether the cathedral will be restored or demolished.
The historic Christchurch Cathedral was built in the second half of the 19th century, but the earthquake changed it considerably. ...
... as the spire and part of the tower of the church was destroyed in the quake. Work to demolish the building began in March 2012, and a temporary cathedral is being built.
When: June 26, 2012
Homes damaged: 347 houses
A fire sparked in the Waldo Canyon in Colorado Springs jumped firefighters' perimeter lines and quickly spread, devouring 347 homes. More than 9,000 residents were forced to evacuate.
The fire left several homes completely burnt to the ground.