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Lender Placed Insurance

Recent events have made the importance of collateral insurance all too clear for mortgage lenders. Just to give you an idea, while the full tally of damage to residential property from Hurricanes Katrina and Rita won't be known for some time, Fannie Mae recently estimated that it will take a $250 million to $550 million hit as a result of the storms. Countrywide Home Loans has indicated that it will face losses relating to Hurricane Katrina that exceed the total losses the company experienced from storms in 2004, when four hurricanes ripped across Florida.

In New Orleans alone, estimates of how many homes may have to be razed exceed 100,000 properties. That must be pretty scary to lenders that have a high concentration of loans secured by homes in the area.

Lender-placed insurance is a tricky, unsettling business that can get lenders in trouble if they don't do it right. Remember, force-placement of insurance was one of the issues that raised the ire of regulators and consumer groups in the Fairbanks Capital case.

When flood or hazard insurance lapses, lenders have to manage the force-placement process as delicately as they can, making sure that they are in compliance with notification and compliance rules that protect consumers while at the same time repairing any breach of insurance coverage to protect investors. You don't want consumers complaining that they just got force-placed when in fact they already had insurance coverage in place. Lender-placed insurance is a small industry, but not an insignificant one. In the wake of Hurricanes Katrina and Rita, the lender-placed insurance business looks more important than ever.

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