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.
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?
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News and Related Story Links:
- American Banker:
- American Banker:
Ties to Insurers Could Land Mortgage Servicers in More Trouble: Force-placed policies impose costs on both homeowner, investor.
- Mortgage Servicer List:
- Money Morning News Archive:
- Money Morning News Archive:
- Money Morning News Archive:
- National Consumer Law Center:
About the Author
Shah Gilani is the Event Trading Specialist for Money Map Press. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.