The forced placed insurance kerfuffle we last discussed three years ago appears to be winding its way to an unhappy ending for loan servicers in the way many claims against loan servicers, lenders, and big businesses of all kinds end in our over-lawyered land: paying huge sums to class action palintiffs' lawyers to make them go away.
To refresh our collective memories, forced placed insurance is property insurance that loan servicers buy when the borrower fails to keep the property insured. As we discussed previously, the practice has been around for decades, and makes sense in terms of protecting the collateral for home loans when the borrower fails to do so. However, as we said in our last post, government officials and the trial lawyers who follow them like orcas in a tuna boat's wake have been worked up over certain close relationships between force placed insurance companies and loan servicers. Commission splits, referral fees, and other alleged "kickbacks" have raised the ire of the righteous, who claim that the entire arrangement is a rip off of the borrower, who ends up having a very high premium added to the unpaid balance of his debt, a premium that would not be so high if servicers weren't profiting from the misery of the deadbeats downtrodden who don't pay their insurance premiums or, in many cases, their loans.
At any rate, after wading through the sludge of civil litigation for a while, servicers are starting to settle. Wells Fargo is the latest. Not that they think that they did anything they should have been sued for, mind you.
"While we believe the lender-placed insurance purchased on behalf of these borrowers was issued in accordance with the terms of the mortgages and applicable laws, we have decided to settle these cases to avoid protracted litigation,” Tom Goyda, a spokesman for Wells Fargo, told HousingWire. “We continue to support our lender-placed insurance services, which provide continuous insurance protection for real property customers when their voluntary insurance lapses.”
They continue to believe in it, but according to Housing Wire, they and the insurance companies are paying homeowners back about 11% of the amount of premiums. That is not chicken feed. Well, for the late John Candy's chicken, it might have been, but for a normal-sized chicken it's a big bag of cornmeal. The linked article also mentions that Chase paid $300 million in a settlement, and Citigroup another $110 million. How much of that actually made it into the pockets of affected homeowners is not related. You can bet your bottom dollar that the plaintiffs' lawyers made out like bandits very well.
My sentiments on this issue haven't changed much in the past three years. As I said in my previous post:
As I've indicated in other posts, I'm no fan of many of the practices of the loan servicers. However, as is the case with loan modifications, the root cause of this particular problem becoming a problem in the first place is the fact that borrowers don't comply with the loan terms they've negotiated. They are in default of the covenant in their mortgages to keep in place homeowners insurance that protects not only themselves, but the lender. The failure to keep such insurance in place gives the lender the contractual right to obtain the force-placed insurance or, for that matter, to declare the loan in default and foreclose. You don't want the servicer ordering expensive force-placed insurance? Pay your insurance premiums.
As I also said at the time, I am more sympathetic to loan investors, since the higher costs for insurance are ultimately borne by them, especially with respect to loans that borrowers don't repay. I thought that aspect of the problem could be better handled by changes to the servicing agreements.
I realize that my sentiments appears to be that of a small minority. The majority sentiment in this country appears to be that loan servicers are all public utilities that exist not to provide a valuable service to loan owners, but to provide low-cost public services to home owners. Any attempt to make money from the process is inherently suspicious and indicates an unreformed reactionary attitude out of line with the the concepts of liberty, equality, and fraternity that ought to motivate all of the citizens of the republic as they work together for "the common good," as determined by Elizabeth Warren and her running buddies.
Under the prevailing view, these servicers are getting just what they deserve. As are the class action lawyers who sue them.