I thought that I'd seen it all with the "Mortgagegate" scandal, but the story that American Banker broke yesterday (Wednesday) underscores why the U.S. housing market has been host to the biggest and most-profitable scam the world has ever seen.
According to the article, the newest development in the American mortgage saga has to do with "force-placed" insurance policies: When mortgage borrowers don't pay their homeowner insurance premiums, are in default or in the foreclosure pipeline, mortgage-pool servicers make sure homeowner properties remain insured by requiring the purchase of a force-placed insurance policy.
That makes sense. After all, the collateral that underlies the mortgage has to be protected from damage or total loss.
As it turns out, force-placed insurance policies are aptly named.
The American Banker article disclosed that the force placed policies that servicers are making homeowners buy can cost as much as 10 times more than standard policies. And servicers are making homeowners buy policies from preferred vendors.
In return for delivering these new insurance customers, mortgage-pool servicers are getting commissions – "reinsurance fees," in insurance-industry parlance, reinsurance fees.
I call these "fees" what they really are – kickbacks.
Mortgagegate Math
Servicers are reaping huge profits from these kickbacks. According to American Banker , while a servicer averages $51 a year from servicing a single loan, in one case the kickback amounted to $7,100 – or about 2,000 times the revenue the servicer would make over seven years, which is the average life of a mortgage loan in a securities pool.
Who are these shyster servicer companies? No surprise here; when we get to the bottom of the pile to see who the dirtiest players are, we once again find ourselves looking at the big U.S. banks.
The largest mortgage-servicing companies are divisions of banking stalwarts Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Citigroup Inc. (NYSE: C).
Sometimes, you immediately know with whom a servicer is affiliated just by looking at its name.
Other times, it's not so obvious.
For example, you'd never guess that Litton Loan Servicing L.P. of Houston is actually owned by Goldman Sachs Group Inc. (NYSE: GS). If you want to find out more about these mortgage services, an extensive list is available by clicking here.
Mortgage-servicing companies are offspring of the mortgage-backed securities ("MBS") phenomenon. Servicing companies perform "back-office" operations that include taking in monthly mortgage payments of principal and interest and passing them through to whoever owns the loans, ultimately the trusts that hold pools of mortgages that back the bonds sold to investors as MBS.
But as borrowers defaulted in unanticipated and unprecedented numbers, loan servicers became more than back-office functionaries.
They first became the frontline troops initially protecting MBS investors interest in underlying mortgage pass through payments.
Later, by impeding loan modifications and stalling foreclosures to continue to keep the fee-train running, and most recently with forced-place insurance – and the kickbacks those policies lead to – servicers have betrayed investors and are looking out for their own business interests at the expense of the investors they were originally meant to serve.
Mortgage borrowers who stop paying their homeowners insurance premiums have their policies cancelled. That puts the lender's collateral – the home – at risk of a fire, flood or any other damage for which the home should be insured. Since it's the servicers who are on the frontlines dealing with mortgage holders and loan servicing, they are charged with protecting the loan collateral by acquiring insurance to protect the home.
Force-placed insurance gets its name from the reality that it's forced onto the homeowner to protect the lender's collateral. Servicers, meaning the big banks, have found a very lucrative niche in forcing very expensive insurance on homeowners. They get very large kickbacks from the insurance companies whose policies they buy on behalf of the homeowner.
In some cases, it has been speculated that servicers may have purposely not paid regular insurance premiums that were capitalized and sitting in escrow accounts waiting to be forwarded to insurers, so policies would lapse and have to be replaced with egregiously expensive force-placed insurance policies.
If the homeowner couldn't pay premiums before, it's highly unlikely that they would be able to pay new insurance that costs as much as 10 times regular insurance. But that doesn't stop the servicers from buying the insurance to get their kickbacks, because the investors in the MBS pools end up paying for the insurance they have to have on their collateral.
It's a win-win for the banks as long as their servicer divisions keep mortgages alive and generating fees for the servicers.
National Consumer Law Center attorney Diane Thompson told the American Banker that "servicers and insurers have turned this into a gravy train."
What's becoming apparent is that banks constructed a daisy chain of fraud and thievery that links their own revenue streams through the interconnected pieces of mortgage origination, securitization, distribution, and servicing. Now they are adding additional fee mongering, via mortgage-servicing-division charges for keeping defaulting loans from being modified and foreclosed so they can reap more late fees, default fees, work-out fees, and now – apparently – insurance-premium kickback "fees."
With all this bank fraud, deceit and thievery, it's a good thing the winners of the midterm elections have promised to attack and hack away at recently enacted, overly intrusive regulations designed to protect consumers and investors. After all, who wouldn't rather be strangled by a daisy chain as opposed to a bunch of posies overseeing our Wall Street heroes?
[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, walks the walk. In a recent Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.
When that downdraft came, Gilani was ready - and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.
Gilani shows investors the monster "capital waves" now forming, and carefully demonstrates how to profit from every one.
But he doesn't stop there. He's also the consummate risk manager. As the article above demonstrates, Gilani also makes sure to highlight the market pitfalls that can ruin years of careful investing and saving.
Take a moment to check out Gilani's capital-wave-investing strategy - and the profit opportunities that he's watching as a result. And take a look at some of his most-recent essays, which are available free of charge. Those essays can be accessed by clicking here.]
News and Related Story Links:
- American Banker:
Official Website. - American Banker:
Ties to Insurers Could Land Mortgage Servicers in More Trouble: Force-placed policies impose costs on both homeowner, investor. - Mortgage Servicer List:
Website Database. - Money Morning News Archive:
Mortgage-Backed Securities. - Money Morning News Archive:
MortgageGate - Money Morning News Archive:
Midterm Elections - National Consumer Law Center:
Official Website.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.