Did you ever wonder why mortgages might get sold? You may have taken the time to find the right bank, or perhaps you are using the same bank that your parents have used for decades. The main reason a mortgage gets sold is because of the interest associated to that mortgage over the life of the loan. For example, if you have a $200.000 mortgage with an interest rate of 6% over 30 years, the interest alone is worth $230,000! That’s a lot of money that the bank has agreed to wait for when they agreed to give you your mortgage. Some banks do not want to wait 30 years to get that money so they sell your mortgage to another bank for a profit and start the process all over again. It’s a game. This happens all the time and if you aren’t paying close attention you could end up with a very big problem.
What problem you might ask? When you buy a house you also purchase an insurance policy on that home. The insurance can be paid one of three ways. You pay the insurance company directly, The bank pays the insurance as part of your mortgage cost each month or the insurance can be drawn directly out of your Escrow account. When a mortgage is sold sometimes the little detail of making sure the insurance payment is made can be overlooked. Regardless of the reason that the insurance payment might be missed, the result can be the same. That result is the cancellation of the insurance on your home and the security to the bank that their investment is covered. When this happens, the bank is notified that you no longer have coverage and from there purchases a Forced Placed Insurance Policy at your expense.
What is that? Well, a Forced Placed Insurance policy is filed under the category of “things you ought to know but usually find out the hard way”. When a lender becomes aware that you no longer have insurance on your home, they will take out what is known as a Forced Placed Insurance policy. This is an insurance policy taken out by the bank with an institution of their choosing. Now this might sound great to you since you didn’t have to raise a finger to get it put in place. No arguing, haggling about prices or spending the afternoon signing your name over and over again. Well, like anything that sounds too good to be true, there is a downside that you must consider.
A Forced Placed Insurance policy only covers the home itself and only the banks interest in the home, usually the amount you owe. What you might not realize is that a standard homeowners insurance policy actually covers more than just your home. It covers situations where someone may get injured on your property, covers the contents of your home like grandma’s antique rocking chair or mom’s china cabinet. With Forced Placed Insurance however, the bank does not have an investment in nor do they care about your TV, your antique bedroom set or your mahogany rocking chair. There is no liability for them if something happens to those articles. Another fact is that the bank does not have much concern for those unexpected “oopsie’s” that happen in your life. Look at it in a real world kind of way. Let’s say you are an avid golfer. You go to the range an average of 3 days per week. One day you hit that perfect drive that you have been practicing all season to hit. It sails over the horizon as straight as an arrow. You can’t wait to tell your friends all about this one. You watch as your little white ball of joy suddenly drops and smacks poor Mr. Jones in the head as he travels to the seventh (and now unlucky) hole in his golf cart, consequently sending him to the hospital in an ambulance. Things go from bad to worse when your lawyer contacts you and informs you that Mr. Jones is suing you for his injuries.
If you had ensured that your insurance remained current and up to date (a standard Homeowners policy) you would be covered against the lawsuit. Since your insurance lapsed however you now have a Forced Placed Insurance policy and are not protected from Mr. Jones’ growing laundry list of injuries. What this now means to you is that you will have to pay out-of-pocket for any damages that the court awards to Mr. Jones. That could be very costly and might just include forcing you to sell your home or worse, having the bank re-possess it because you have been forced to pay the amount of your mortgage to Mr. Jones instead of your bank.
You may never again hear the term Forced Placed Insurance, and we hope you don’t. The good thing here is that you are now a little more informed about how this can happen and take the proper precautions to avoid being in the very situation described above.