When people take out a mortgage, they’re often required to obtain homeowner’s insurance on the property. This policy protects the lender’s interest in the property as well as the owner’s.
But what happens if the owner later cancels the policy, or simply stops paying the premiums?
Since the housing crash a few years ago, millions of Americans have allowed their homeowner’s insurance policies to lapse. Sometimes this was inadvertent – they just forgot to pay the bill – but in other cases the owner was struggling and had trouble affording the payments.
Typically, in such cases the lender is allowed to obtain a new policy and “force” the homeowner to accept it.
This is fair, since the owner signed a contract saying he or she would maintain the policy, and since the policy exists in part to protect the lender. But what isn’t fair is that these “forced” policies are often far more expensive than the original policies were. A typical “forced” policy costs at least twice as much as a voluntary policy, and in some cases costs 10 times as much, according to the Federal Housing Finance Agency, the government bureau that oversees Fannie Mae and Freddie Mac.
One reason for this, the agency says, is that insurance companies often pay fees and commissions to banks in order to persuade them to select their more expensive policies. These fees and commissions can amount to 10% or more of the annual premium.
So the agency has announced that it is planning to ban these fees and commissions. The ban will apply to all mortgages that are owned or guaranteed by Fannie or Freddie – which is about half of all mortgages in the U.S.
The ban should eliminate banks’ incentive to select more expensive policies, and result in savings to homeowners, the agency says.
If you have a “forced” insurance policy, it’s a good idea to examine how much you’re paying, and shop around. You can always replace the forced policy with a different policy, as long as the new policy meets the requirements in the mortgage agreement.