Nonexistent House That Was Insured Shows Reform Need

Borrowers were stunned to find themselves billed for lender-placed insurance on a house that no longer existed because it had burned down. Image: Fotolia.

A federal agency’s strange and unexplained decision to nix a plan that would have saved consumers and the government millions of dollars is even more curious when you consider what happened to a Southern California couple who lost their house in a 2003 fire.

Harold Turnbull and his wife were forced to pay for costly homeowner insurance, even though there was no longer a house to insure. Actually, “costly” isn’t the word. “Exorbitant” or “outrageous” are better choices. At one point, according to their lawsuit against Bank of America, the Claremont couple were paying $2,783 for $50,000 in coverage. That’s five times more than what they paid for their $100,000 market-rate policy before the house burned down in the Padua Hills wildfire.

Welcome to the wild and highly profitable world of force-placed insurance, in which a lender can maintain coverage on a house if the homeowner doesn’t. And if the homeowner doesn’t pay on the policy, the lender can foreclose. It’s all right there, spelled out in the fine print in the mortgage papers—and for good reason. Lenders need to know that the collateral for their mortgages is protected by insurance should something happen to it.

So lenders have every right to force borrowers to pay for coverage of their choice if they don’t maintain their own policy, but some lenders have turned forced coverage into a huge profit center by allegedly contracting with insurers that charge hefty premiums and then kick back some of their fees to the lenders who hired them in the first place.

A plan put forth by Fannie Mae would have stopped all that. Rather than allowing the lenders from which it buys mortgages to purchase hazard insurance, the big secondary market company wanted to buy coverage directly from insurers at as much as a 40% discount, according to some reports.

Fannie’s plan to purchase insurance from its own vendors would have saved the government and consumers upward of $1 billion, consumer groups maintain. But the company’s overseer, the Federal Housing Finance Agency, scuttled the idea.

An FHFA spokesman told trade publication American Banker that it wants to put its own forced-place rules into effect, rules that include Fannie Mae’s sister company, Freddie Mac, which also covers primary lenders under the FHFA’s stewardship.

But clearly, there is a lot of behind-the-scenes intrigue going on among the agency, big banks and the carriers that dominate the force-placed insurance business.

The decision did not sit well with consumer advocates. “The FHFA’s action maintains the status quo of massive overcharges to borrowers and taxpayers,” said Birny Birnbaum of the Center for Economic Justice. Attorney Andrew Pizor of the National Consumer Law Center agreed: “FHFA’s decision harms nearly everyone.”

Certainly, Fannie’s plan would have helped the Turnbulls, who were paying $501 a year for a $100,000 policy on their home until the fire. Then, since there was no house, they dropped coverage.

That’s when Countrywide Home Loans, which was subsequently acquired by B of A, began charging for force-placed insurance. Originally, the couple was charged $367 for $50,000 in coverage, according to their suit, which alleges fraud. After the merger, the suit maintains, Bank of America jacked up the premium to $1,508.

Twenty months later, the premium was increased again, to $2,783. That’s a 658% jump from the original fee and more than five times the amount the Turnbulls paid for twice as much coverage before the fateful fire. “Unbeknownst to them,” the suit alleges, “the Turnbulls were funding the commission and the kickback” between B of A and the insurance carrier.

During all this, Harold Turnbull, a college professor, says he repeatedly tried to undo the force-placed coverage by telling the bank “that their property was devoid of a home and that they maintained umbrella liability coverage on the vacant lot.”

It wasn’t until the couple filed suit in the Superior Court of California in Los Angeles County that the bank returned their money, about $14,000 plus a “tiny bit” of interest, says their attorney, Travis Corby of the Shernoff Bidart Echeverria Bentley law firm in Beverly Hills.

But the Turnbulls aren’t quitters. Not only have they continued to pay their mortgage on a nonexistent house—the couple still hopes to rebuild one day, says Corby—but also they are going ahead with their suit. It’s about principle now, not money.

Meanwhile, in Washington, Rep. Maxine Waters of California has written FHFA’s acting director, Edward DeMarco, asking for an explanation of why his agency gave Fannie Mae’s proposal a thumbs-down.

In her request, Waters, the ranking Democrat on the House Financial Services Committee, asked for the documents that formed the basis of the FHFA’s decision, plus a list of outside stakeholders it consulted.

Bank of America did not respond to repeated requests for comment about the Turnbulls’ suit. But companies rarely have anything to say while an action is pending.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance-industry publications. Readers can contact him at lsichelman@aol.com.