Is Force-Placed Insurance On its Way Out?

03 May

A recent piece of news has had Georgia homeowners and prospective home buyers sit up and take notice. According to The New York Times, the federal and state housing regulatory have swooped down on a long-standing practice called the force-placed insurance and are toying with the idea to trim the fees that banks charge insurance companies for these covers. They are even considering banning it altogether. The idea was proposed by the Federal Housing Finance Agency and if it is implemented across board, then homeowners across the country will see a drop in the amounts they have to shell out to cover their properties.

Many Georgia homeowners are keeping their fingers crossed. But for the uninitiated, the following discussion will serve to throw more light on the matter.

What is Force-Placed Insurance?

Buying an insurance cover for their properties is one of the pre-conditions of obtaining a mortgage for a house. There are many mortgage schemes that also let lenders buy an insurance policy for a property and include the price of the cover within the homeowner’s premium if the latter allows the policy to lapse or does not pay the insurance bill. This practice is called force-placing an insurance policy and according to the Federal Housing Finance Agency (FHFA), the Consumer Financial Protection Bureau, and the National Association of Insurance Commissioners, this often raises the premium amounts to unjustifiable highs. What is more, this rampant practice often imposes abusive costs on homeowners. These costs are often twice more than what a voluntary insurance package costs.

According to the FHFA, usually banks and lenders take out these policies as they stand to gain the most from these if the homeowner does not have any or sufficient coverage on his property. Sometimes lenders have been known to inflate the prices of their policies without the unassuming homeowner having an inkling of it.

The FHFA Recommendations

The FHFA has laid down strict guidelines that seek to curb the force-placed insurance policy practice. The Agency has put a cap on the amount of fees or sales commission banks can collect from insurance companies on force-placed insurance policies. These guidelines are subject to a 60-day comment period during which time, the Agency will seek inputs from industry stakeholders regarding the feasibility of the proposal.

After this 60-day period is over, the Agency may revise the guidelines or mandate Freddie Mac and Fannie Mae, the government-sponsored enterprises that are also two of the biggest mortgage guarantors in the country, to execute the proposal.

What’s in it for Georgia Homeowners?

The announcement by the FHFA has many a Georgia homeowner cheering. If the guidelines by the Agency come into effect, they would save thousands of dollars on their premium payments. On the other hand, this news has made many prospective Georgia homeowners hopeful that the insurance costs will come down to an extent that they can afford a new house. In any case, the both groups are waiting with bated breaths for the FHFA to cement their plans.