The first round of Wikileaks email dumps from Bank of America support accusations that BofA deliberately mismanaged mortgages it was servicing in order to generate higher fees and cheat mortgage owners. Here’s how it works:
First, say you bought a house through Bank of America. Bank of America sold the loan to the secondary market, where it was bundled into a mortgage investment and sold to investors, but BofA continues to service the loan.
As a person with a mortgage, you are required to have homeowners insurance in case your home is damaged. You pay the premium a little each month as an add-on to your house payment.
As the mortgage servicer, Bank of America sets aside the homeowners insurance premium and pays the insurance company when the premium comes due.
These emails document BofA deliberately not paying the premium, (leading, of course, to cancellation) and buying alternate insurance from its own subsidiary, Balboa Insurance.
How? If you don’t have your own homeowners’ insurance, the mortgage contract allows your lender to buy insurance to cover its own interest in the home (and not yours). This is called force placed insurance. Since the loan is owned by investors, the servicer actually buys the insurance, and the premium is charged to either the investor/owner or you. Balboa Insurance contracts with a long list of mortgage servicers to monitor accounts for insurance payments and to buy alternate insurance if premiums lapse.
1. Balboa Insurance is in the business of selling this kind of insurance. It has a vested interest in getting rid of your insurance and substituting its own.
2. This kind of insurance is much more expensive than standard homeowners insurance, and there is often a commission-splitting arrangement (aka kickback) with servicing banks like BofA. What kind of cost difference are we talking? Think $4,000 vs. $33,000 with a kickback of $7,100.
3. The new insurance is often reinsured by the servicing bank for another fee.
And here’s the really tricky part. Who has authority to submit an insurance claim if anything happens to the home? The loan servicer. If the loan servicer is the ultimate guarantor of the insurance (see #3 above), how likely is it that BofA is going to submit a claim against itself to reimburse investors downstream?
So after all these extra fees, neither the homeowner nor the investors who own the loan–the real parties in this transaction–are left with insurance protection if anything does happen to the house. But boy, the servicer and the insurance company clean up!
In addition, the emails suggest that federal regulators at least knew about if not helped facilitate this as well as improper foreclosures and favors to corporate clients. That sheds a whole new light on settlement talks between regulators and Bank of America, which would take another article to discuss.
And this is only the first BofA info dump.
Wikileaks information came from anonymous whistleblower(s). With anonymous whistleblowers, there is always a risk that information is false. Disgruntled employees lie or exaggerate. Last month, Wikileaks dumped information documenting that BofA had started a campaign to minimize the impact and credibility of anticipated Wikileaks information by discrediting Wikileaks and planting false information. So it’s always wise to have one eye on whether we’re being played.
In this case, financial news sources including The Atlantic, Daily Finance, Seeking Alpha, and one of my favorite financial bloggers, Yves Smith at Naked Capitalism, have all found the information to be credible.
And it makes sense. A lot of what is wrong with the whole financial system stems from inherent conflicts of interest like this that are allowed to not only exist but run amok. Brokers sell people stock based on the commission the broker receives. Banks create investments out of rubbish, pawn them off, then bet against them. And regulators say nothing, either because they get a cut now or because they want these schemes to be around when they go back into the private sector. Deregulation did not create greed but it created an environment in which conflicts of interest like this–and greed–can flourish.