Monday, January 31, 2011

Unregulated Abuse, or Plain Scam?


How Banks are allowed to force insurance on homeowners at up to 20 times the normal price, and eventually cause foreclosures.
 
More than three years ago, at the height of the real estate boom, I sold a Florida condo to a French couple.
They laid down a 30% down payment at the time, and  took a mortgage loan with a major national bank.
They have seen the value of their property sink to about 40% of its original value. The typical case of "underwater mortgage". 

However, they always acted responsibly, and promptly paid every month to the bank, the condominium association, and the property tax authority. 

A couple of years ago, my client sent me an email from his country asking for help. The bank was charging his account a high amount, which he didn't understand.

I made a few calls and finally understood that the bank needed a copy of the renewal of the condominium association insurance. Meanwhile they had taken insurance on his behalf, with a cost of about 15 or 20 times more than the market standard. I contacted the office of this association, which is under the administration of a large management company.
They agreed to fax a copy of their insurance policy to the bank. Meanwhile the bank was claiming they had not received these copies for an unknown reason and my client was getting anxious. I kept calling the bank, going through many operators, stoically enduring long minutes of waiting on the phone, with the musical background.

Between my client's battered English and some hours of my time on the phone, we finally managed to make somebody in the bank understand that they had to stop charging the account. Then my client had to struggle a couple more months to get the refund of the high charge to his account. When I had asked the bank why they had not advised my client before starting the process, I got a vague mention of some letter mailed to the client, which he had never received.

I advised my client to make sure that in a few months, the situation wouldn't be repeated, because insurance policies expire every year. The condominium building has about 300 units and I am almost sure that the same bank must have a few loans pending in this building. But they don't keep this kind of record and just ask for these policies year after year.

All condo associations in Florida maintain certain insurance to cover building damages caused by fire, flood, or hurricanes. Otherwise, nobody could get a mortgage to buy a condo in Florida. But apparently the banks want to keep track at all times of these policies. 

As can be expected, the next year, my client called me again. Now the condo association had taken an internet service which had to be used by condo owners if they wanted the insurance policies sent to the bank. In other words, he had to sign up with an outside company to get the insurance papers faxed to the bank

I helped my client navigate through the sign-up and other hassles and make sure that, this time, his policy coverage was sent in time to the bank. The condo association was apparently overwhelmed by hundreds of similar cases.

Of course, the cost of the new technological "solution" would pad some pockets, and good luck to homeowners not so proficient with internet and online niceties. 

Fast forward another year. My client calls me again from France. The bank had started the same process again, charging him a very high amount for "insurance premiums" and "late charges".

Back to the phone, the obnoxious musical background, the repeated explanations to multiple operators who kept affirming that the bank hadn't received proof of insurance, while the condo association kept affirming that they had sent it time and again  to the bank. Of course, after some bad blood and lots of wasted time, everything was in order; my client's account showed the refund. The game had become a yearly ritual of suffering, anxiety, and bad blood. 

My client, who was actually feeling uneasy about my voluntary and non-compensated dedication to solve this annual problem, wrote me that he owned another property in Europe, and that it was so easy, compared to his US nightmare, where it seemed necessary to hire a secretary just to take care of management.
The next case is my Cuban boat mechanic. Not a highly educated person, he is however an excellent professional and I developed a very friendly relationship with him. He came to me one day with a bank statement that he didn't understand.

His $200,000+ home had an $80,000 pending mortgage, and he was paying promptly about $670 every month to another large and well-known national bank. He had received a notice of late-payment and the bank claimed a balance to pay of about $8,000. 

He had gone to the bank's office and they had told him about a homeowner's insurance proof that had not been received by the bank. I accompanied him to his bank's local office and the officer in charge insisted that  his policy had not been sent by his agent to their central service.  

Actually his agent had sent it twice. However, state laws had changed the flood zones, and his flood insurance premium (about $200 per year) had to be increased by about $20 a month. He had not received any bank notice until the day his account was charged. 

I called the bank and indicated that he had increased his insurance by the small amount and had faxed them the proof. To make a long story short, it took me about three months, gallons of bad blood, unending discussions that invariably ended with the promises that all matters had been resolved, until the next letter was received by my Cuban friend, with the news that he owed still more money. 

The bank had taken a flood policy at a cost of roughly TWENTY times the average cost of flood insurance, through an unknown company. (Let's not try to investigate who the real owners of that insurance company are).

This one was just a volunteer effort on my part. I felt that my friend could possible lose his home if, as he said, he disregard all this foolishness and just pay every month his mortgage payment, leaving behind undue insurance premiums and "late charges".

However the bank kept adding late fees and mailing threats to eventually foreclose on the house unless satisfied. One day, they told me that they were crediting some quantities to my friend's account. But they did not. I called again and the operator said that they had credited the amounts but they had placed the money in a "temporary" account where it was sitting, nobody caring about transferring it to my friend's mortgage account.

I have lost count of the long negotiations, until one day, after a long fight on the phone; a "supervisor" said that, if my friend would pay a fine of about $54 for late payment, (!) they would close the case. It took me an hour to convince my indignant Cuban friend to just pay and get done with it.
The matter was eventually resolved. The account was cleared. But guess what?
A few weeks after, there was another proof of insurance demand.
This time it was the homeowner insurance. Luckily, he called promptly his agent who faxed the proof of insurance, and problems were avoided.

The agent told him, however, that he had this kind of cases many times every month, and this insurance agent's opinion was that a few people didn't know how to address the problem and ended up paying through the nose the enormous costs of unnecessary insurance. The agent told him that he was dedicating an exhausting amount of time and effort to satisfy hundreds of client's requests, and faxing over and over dozens of proof of insurance to mortgage lenders. In few words, the banks were using a numbers' game to pocket millions of dollars of undue profit.

A certain percentage of homeowners would just pay because they are too old, less educated, or just too busy at work to find the time to fight the abuse.  If this percentage is only 10% it would mean billions of dollars of undue profit.

We all understand that banks could be worried by an uninsured mortgaged home. It would be very easy for them to have on file the phone or fax numbers of the appointed insurance agencies or condo association who will send them proof of insurance. Instead, banks choose to set up whole operations whose job is to charge as many clients' accounts as possible, at unbelievably high premiums, and pocket the profit.

How can we explain that these banks do not use the same insurance companies that everybody uses, instead of insuring with unknown agencies at 2000% of the normal cost?

Is there any hidden reason?   Inevitably you suspect.

Do the Federal authorities know about this? They could easily mandate mortgage lenders to only contract insurance policies at the normal market cost.
Or is there a vested interest in abusing an already suffering public?

Is this why we have bailed out these "institutions" which squandered our money and our savings? I am sure that I am not the only one asking this question. But until we regulate this, hundreds of millions of dollars will be ripped off humble homeowners; of course, those most in need of assistance.

I researched some more into the matter and found out that this has lately become a widespread practice.

It affect especially those who chose to act honestly, pay their mortgages, even though their home value is much lower that the amount of their loan.

I talked to a few insurance agents and they all know about the issue. 

Well, to end the story, my Cuban mechanic called me a week ago, and came to see me again with a new threatening letter from his bank. Barely three months after I had settled or fixed the first problem.

They were requesting again insurance proofs, or else.... I am talking about the same insurance that his agent had sent the bank three months ago.  My friend called both his agents, since he has two different agents for his flood and his homeowner's policies. He begged them to fax one more time these policies to the bank.

He told me that one of his insurance agents had finally lost patience and told him that he had enough and that this was the "last time" he was faxing the papers. 

Otherwise, he said, my Cuban friend could go find himself another insurance agency. 

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