July 2012

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FEATURE a loss ratio of 55 percent, one major insurer's actual loss ratios for the last six years averaged 22 percent and another averaged less than 20 percent. According to the investigation, high rates for force-placed insur- ance appear to be due in part to relationships between and pay- ments by insurers to banks and their affiliates, including mortgage servicers and insurance agents and brokers. Insurers pay high commissions to the banks or their affiliates, presumably to guarantee the insurers will receive business. Early findings of the investigation ber of very significant problems with force-placed homeowners insurance. The price is often extremely high—as much as 10 times the normal rate for homeowners insurance. And sometimes consumers have this high-priced policy forced on them when their own insurance is still in place. At the hearings, we will explore whether banks suggested 15 percent or more of premiums collected by force- placed insurers flow to the banks through insurance agents affiliated with the banks. "There appear to be a num- are using force-placed insurance to increase their profits at the expense of homeowners and investors," Lawsky said. The situation has caught the attention of state regulators and the Consumer Financial Protection Bureau, which is considering rules to help home- owners avoid unwarranted force- placed insurance. Homeowner advocates such as Alexis Iwanisziw of the Neighborhood Economic Development Advocacy Project have their own sugges- tions, which include requiring mortgage servicers to continue payments of homeowners' existing insurance policies or to re-establish the policies if home- owners miss payments or ensur- ing, when force-placed insurance is necessary, the cost is reason- able and that all premiums paid are applied exclusively to the cost of the force-placed insurance coverage. "These changes will put a stop to the now-pervasive mortgage servicing abuses that result from servicers' financial stake in force-placed insurance policies," Iwanisziw said. Home Warranties Gain Ground As the economy struggles, affecting home values and perhaps forcing cash- strapped homeowners to skimp on maintenance or repairs, the market for home warranties has revived. Are they worth it? T he answer—as with so many similar ques- tions—is it depends. A home warranty gives the buyer peace of mind on moving into a new home, according to Gena Riede, a Realtor in Sacramento. "If the stove stops working, the dishwasher conks out, or suddenly the electricity goes hay-wire, there is a licensed specialist to the rescue for a minimal cost," she said. The war- ranty, she added, "is a safeguard for the seller as well as the homebuyer," adding, "you never know when something will stop working prop- erly, and it's best to be safe than sorry." Leonard Baron, a San Diego State University lecturer, says that while warranties "have been around for decades but have just started to be widely purchased in the past 10 years. They are often used in sales transactions as a kind of 'insurance policy' that the seller can provide for the buyer. The theory is that if something goes wrong with a covered item—appliance, electrical, plumbing, etc.—the buyer will call upon the insurance policy instead of blaming the seller. While this sounds great in theory, the general policies have some significant limitations and issues." The blogosphere is littered with personal stories about how economical home warranties are or, on the flip side, how they are customer service nightmares. "Home warranty companies could have cus- tomer service issues that should cause a buyer some concern," agreed Baron. "However, to be fair, much of this comes from a common mis- understanding about what is actually covered. This happens because few people who receive the policies actually read them to find out what is not covered—like pre-existing conditions or certain appliances in the basic policy. Of course, some complaints result from compa- nies refusing to cover certain items and hope that people will give up trying, but it should be noted that some of these claims are just plain dubious." An episode of the hit TV series House featured several scenes in which the title char- acter made several attempts to get insurance coverage, including intentionally breaking a ceiling, breaking a pipe, and even setting a fire. He spent more money causing the dam- age than it would have cost him to pay for the repair in the first place. There are plenty of people, according to Baron, who make claims, get paid out, and are happy with their service. But, there seem to be a lot of people who are not very satisfied. There are, of course, three, not two, parties in the transaction when a home is purchased: the seller of the property, the buyer, and the warranty company. From the seller's perspective, it might appear offering a warranty is a good marketing tool, but the inspection leading up to the warranty could expose flaws in the property of which the seller was unaware and drive the price down. That said, according to Baron, about 80 percent or more of residential sales come with a home warranty policy. From the buyer's side, if the seller is throwing in a home warranty policy, the buyer may have nothing to lose—if the company honors claims or if claims are even submitted. Many buyers forget they even have the policy, something insurance companies count on, and clauses within the policies may be so restrictive that if a claim is unsuccessful, many homeowners just opt to call a local repairman, which could end up voiding the warranty. Overall, according to Baron, "it seems the restrictions on claims, exclusions, and customer service issues tilt somewhat against paying $350–$500 per year for a policy that you may not actually use." THE M REPORT | 29

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