Assurant tumbled 11% Wednesday after the discovery of yet another seamy side to the mortgage industry.
The American Banker published a story laying out apparent abuses in the business of so-called force-placed insurance – the practice in which creditors such as mortgage servicers buy an insurance policy to replace a homeowner’s lapsed one.
That’s fine as far as it goes, since it helps to cover the banks and mortgage investors against damage on properties where homeowners have fallen behind on their payments.
The problem, the American Banker reports, starts with the fact that the force-placed policies “can be 10 times as costly as regular policies, raising struggling homeowners’ debt loads, pushing them toward foreclosure – and worsening the loss to investors on each defaulted loan.”
The report, written by Jeff Horwitz, continues:
Evidence of abuses and self-dealing in the force-placed insurance industry suggests that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes.
Behind banks’ servicing insurance practices lie conflicts of interest that align servicers and their insurer partners against borrowers and investors. Bank of America Corp. owns a force-placed insurance subsidiary, and most other major servicers receive commissions or reinsurance fees on the very same policies they purchase on investors’ and borrowers’ behalf.
“There’s no arm’s-length transaction here, and that creates all sorts of incentives for the servicer to force-place excessive insurance and overcharge consumers for policies that provide minimal benefit,” said Diane Thompson, of counsel for the National Consumer Law Center. “Servicers and insurers have turned this into a gravy train.”
The ride on that gravy train has been especially savory for Assurant, which has been expanding the highly profitable specialty property business that contains the force-placed insurance operation. The American Banker says that specialty property has brought in more than 90% of the company’s profits over the past year.
Assurant tells the American Banker that its practices are regulated by state insurance overseers and that it believes it is in compliance. But analysts note that the company has been warning about falling margins in that business as the mortgage servicing business consolidates.
The biggest servicers, led by Bank of America , JPMorgan Chase and Wells Fargo , have been expanding their control of the U.S. market, which stood to mean less dollars coming Assurant’s way even before the latest revelations.
“In the specialty property division, revenues are likely to be pressured by low loan originations, a decline in forced-placed penetration rates, and a shrinking REO book,” JPMorgan analyst Jimmy Bhullar wrote in a note to clients last month.