It is possible for an insurance policy to force someone into New York foreclosure. These would be “forced-place” insurance policies. As the name suggests, the policy is forced into place onto the homeowner by another party. Before going into how this can lead to or aggravate a foreclosure, it’s necessary to explain why a party would do this.
Although homeowners are obligated to purchase insurance for their homes, if they don’t have it for whatever reason, lenders might purchase it for them. The reason for doing so is that if the home is damaged, then its value declines. Since a homeowner pledges the homes as collateral to the bank for the mortgage, the bank has an interest in maintaining its value too.
As a result, banks buy insurance policies for the home and then charge homeowners for the payments. But why stop with any old, appropriate policy when they’re not the ones paying for it? This segues into all the ways lenders abuse forced-place insurance, which can lead to New York bankruptcy:
- Sometimes lenders over-insure homes. In some instances, even, banks receive kickbacks from insurers for purchasing high-priced policies and then pass the costs to the homeowner. Often the policies are costly yet do not protect against damage to personal items or owner liability.
- In even worse scenarios, banks’ subsidiaries will reinsure properties to increase profits. Vastly over-insured properties are costly to homeowners.
- Homeowners who pay their mortgage bills, which often include the insurance, into an escrow account at another bank might find that the lender misses the payment to the mortgage lender, triggering a purchase of forced-place insurance on the property to ensure the property is protected.
- In other cases, lenders have bought back-dated policies to protect homeowners from events that already occurred and then stuck them with the bill, even if no damage occurred.
To some degree, the Dodd-Frank financial regulation law dealt with forced-place insurance, but New York State’s Department of Financial Services (DFS) has reached settlements with some forced-place insurers for gouging New York homeowners. Many people in the state reported that the forced-place insurance policies raised their mortgage payments by hundreds of dollars and then forced them into foreclosure.
There are some ways to avoid forced-place insurance policies being placed on your home. One is to seek your own policy and pay it separately from your mortgage. Another is, if possible, to pay the entire policy annually rather than monthly. It can be more expensive up front, but fewer payments means a reduced likelihood of default. If your lender has purchased an insurance policy for your home, you can try to get your old policy reinstated or purchase a new one. Then gather as much information on the forced-place policy as possible, and then request the lender to cancel the policy. The one thing not to do is stop paying the new policy or your mortgage payments.
The DFS’s Web site has resources that can help homeowners with forced-place policies.
If a forced-place insurance policy is sending you into foreclosure, then it’s a good time to contact an experienced New York bankruptcy lawyer to help with your case.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn NY foreclosure attorneys Bruce Weiner for a free initial consultation.