A decision of the United States Bankruptcy Court for the Western District of Pennsylvania provides a clear example of why homeowners who become delinquent on their mortgage payments and seek to find a remedy to prevent the loss of their home should continue to maintain insurance coverage on their home. Stephen Mesich filed a Chapter 13 Bankruptcy Petition. He filed a Chapter 13 Plan proposing to cure and reinstate his mortgage by resuming regular monthly mortgage payments and paying the arrears – the payments he was behind – over the life of his Plan. PHH Mortgage held the mortgage on his home and filed a proof of claim for delinquent mortgage payments and other contractually required payments. The claim included the payments made by PHH for “forced placed” insurance on the Mesich home in the amount of $7,445, which PHH had paid to American Security Insurance.
Mesich filed an objection to the claim which resulted in an adversarial proceeding Mesich v. PHH Mortgage to determine whether Mesich was contractually required to pay PHH the cost of the “forced placed” insurance.
Homeowners are required by lenders to insure their property in an amount sufficient to protect the lender from an reduction in the value of the property resulting from fire or any other insurable loss. In New Jersey, the great majority of homeowners have monthly mortgage payments which include “escrow” for property taxes and the cost of their homeowners insurance. When monthly mortgage payments are not made, lenders obtain “forced-placed” insurance.
There are two important things that homeowners should understand about “forced-placed” insurance. First, “forced-placed” insurance costs many times more that standard homeowners insurance. Second, “forced-placed” insurance insures only the interests of the lender and not the homeowner. A standard homeowners insurance policy covers items such as personal property in the home and may provide for alternate housing where the property is damaged sufficiently to be unlivable. “Forced-placed” insurance, on the other hand, covers only the amount of the loan and not the full value of the property.
Homeowners who file a Chapter 13 Bankruptcy and Plan to cure the arrears on their mortgage to prevent foreclosure will be required to pay the cost of “forced-placed” insurance or “lender-placed” insurance, if, and only if, they have failed to maintain their homeowners insurance.
However, in Mesich v. PHH Mortgage, the Bankruptcy Court found that Mesich had continued to maintain insurance coverage on his home during the period he was in default on his mortgage payments. Therefore, PHH Mortgage was not entitled to collect the cost of the “forced place” insurance which PHH had placed on his home.
Class action lawsuits have been filed alleging that mortgage companies who obtained “forced-placed” insurance on the homes of those who became delinquent of their mortgage payment engaged in a scheme to profit from these polices. These lawsuits claim that Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp. and Wells Fargo & Co., placed insurance on homes in amounts far exceeding the value of the home – inflating the premiums charged – and had no relation to the risk of loss to the lenders. These suits further allege that these banks received kick-backs from the insurance carriers. Some of these suit have been settled and others are pending.
In sum, homeowners who wish to avoid foreclosure and have a realistic means to do so, should keep their homeowners policies in force by paying the premiums. Those who may not wish to keep their properties but remain as the resident or owner during what may be a lengthy foreclosure process should also maintain their own policies. Those who do not have homeowners insurance and are therefore incurring the cost of “forced place” insurance should promptly obtain their own homeowners policy, notify their mortgage company, and request that any “forced place” insurance policy placed on the property be immediately cancelled.