Compared with her neighbors' well-tended homes in St. Paul's historic Cathedral Hill neighborhood, Jean Keeney's 19th-century property looks a bit forlorn.
The lot is overgrown, paint is peeling and two ragged posts are all that's left of the front railing. It has been years since Keeney could afford to maintain her home the way she wants. At 77, an age at which the former stockbroker thought she would be comfortably retired, Keeney is toiling away as a substitute teacher, trying to keep her lender from foreclosing on her home.
"I would rather not be working, but I need the money," she said.
Like thousands of other Minnesotans, Keeney's financial problems involve force-placed insurance, a little-known form of coverage generating billions of dollars in profits for insurers and banks -- but getting little scrutiny from state regulators.
Billed as a policy of last resort, force-placed insurance is routinely imposed on homeowners by lenders when property is not covered against tornados, floods and other hazards. The coverage can cost 10 times as much as typical homeowners insurance despite offering less protection.
Across the country, the high premiums are pushing hundreds of thousands of vulnerable homeowners closer to default as the costs are added to their monthly mortgage.
When Keeney's homeowners policy lapsed, she was pushed into a forced-placed policy at an annual cost of $4,185, well above the $1,655 she used to pay State Farm. "It's ridiculous," she said.
Minnesota officials concede they have no idea whether those rates are reasonable.
Unlike most states, Minnesota regulators allow insurance companies to set their own rates on force-placed insurance without requiring either state approval or public disclosure. That means regulators don't check whether insurers have padded the bills.
In an interview, Commerce Commissioner Mike Rothman said he was alarmed by the Star Tribune's findings and pledged to make force-placed insurance "a top priority."
The department is reviewing its policies, and has requested current rates and other documents from firms providing force-placed insurance in Minnesota. "We want to make sure we are protecting consumers from inappropriate practices," Rothman said.
Regulators in other states have also begun scrutinizing the industry after consumer advocates complained about alleged price gouging and questionable ties between insurance companies and lenders.
Mortgage lenders typically receive a commission from carriers when they push their clients into force-placed coverage. Those commissions and other payments are big business for banks. For example, JP Morgan Chase -- one of the nation's biggest mortgage lenders -- disclosed in May that it earned $663 million in the past five years by charging commissions of up to 20 percent on each policy and splitting profits with its insurer.
"These [banks] are making more money by keeping things in foreclosure rather than trying to fix things," said Kristin Siegesmund, head of the consumer unit at Mid-Minnesota Legal Assistance.
Mortgage lenders and insurance executives say force-placed policies are necessary to protect the bank's investment when the homeowner can't. And, they note, homeowners are warned in advance when they face forced placement and are encouraged to buy their own insurance beforehand.
"We've found that large mortgage servicing companies -- and even small ones -- do not want to force place," said Kevin McKechnie, executive director of the American Bankers Insurance Association, a trade group. "It is not a happy experience for anyone."
'It can be devastating'
Like many homeowners who end up with force-placed insurance, Keeney has struggled with her finances for years. Her problems revolve largely around her two adult children, who suffer from mental health issues. Neither has a full-time job. To help support them, Keeney took out home-equity loans totaling more than $125,000. But in 2008, unable to keep up with mounting debts, she stopped paying her property taxes and insurance. She is trying to work out a payment plan for the $33,127 she owes.
Between her investments and teaching income, Keeney earns about $40,000 a year, or enough to pay back the overdue taxes. What she can't cover is the $12,949 she owes for about three years of force-placed home- owner's insurance.
"It can be devastating," said John Sulzbach, Keeney's mortgage counselor at Lutheran Social Service of Minnesota. "She'd have a whole lot easier time if the insurance was reasonable."
In many cases, homeowners should never have been pushed into such coverage. Nationwide, about $2 billion of $5.5 billion billed for force-placed insurance was eventually canceled or refunded in 2011 because of "false placements," according to Birny Birnbaum, a former Texas insurance regulator who serves as executive director of the Center for Economic Justice.
But mistakes can take months to correct. Homeowners must challenge the placement and endure high premiums until they convince lenders there was an error.
"They shouldn't be making that many mistakes," said Andrew Pizor, staff attorney with the National Consumer Law Center. "Consider the time and energy and angst that homeowners have to go through."
As an example, Pizor pointed to the case of Glen and Charlotte Cothern of Holly Springs, Mississippi. Though the Cotherns never missed an insurance or mortgage payment, their lender -- American Home Mortgage Servicing Inc. (AHMSI) -- mistakenly concluded their policy had lapsed and obtained additional insurance for the property in 2007, according to a federal judge's 2010 ruling on the case.
The Cotherns' insurer provided proof of coverage, but AHMSI refused to cancel the second policy. Instead, the lender placed the Cotherns' account into default and began tacking on late fees. It began foreclosure proceedings in 2009. Eventually, the judge concluded, the Cotherns were forced to seek bankruptcy court protection to prevent the loss of their home.
The judge ordered the bank to reinstate the loan and forgive all late charges and other improper assessments. "The incompetence here is absolutely radiant," he said in his ruling.
High rates, few claims
From 2004 to 2011, the average loss ratio in Minnesota for force-placed insurance was just 25 percent. That means insurers had to spend only a quarter of the money they received in premiums on claims, according to Birnbaum's analysis.
Such a low claims rate is unusual in the insurance industry. By comparison, insurers in the regular homeowners market spent 91 percent of their premium dollars on claims. Nationwide, the loss ratio for force-placed insurance was 24.2 percent from 2004 to 2011, far below the rest of the market, Birnbaum said.
At a May hearing in New York, insurers testified that damage claims haven't caught up with unprecedented growth in the force-placed industry, which they attributed to the recession. In 2011, insurers collected a total of $3.5 billion from force-placed insurance, up from $1.6 billion in 2007, the year before the market crashed, according to state insurance reports.
Insurers said losses were also low due to a long period in which there were few catastrophic events. They said many homes they insure are risky propositions because they have been neglected during foreclosure proceedings or are in states with high exposure to catastrophic events, such as Florida. "When the borrowers actually leave the property, we are going to see a lot of losses that we don't know about right now," testified John Frobose, president of American Security Insurance Co.
Some regulators don't buy that argument, noting that current losses are about half of what insurers originally projected. Regulators also are concerned about lack of competition. Just two companies control more than 90 percent of the force-placed market: Assurant, parent of American Security, and QBE.
Lenders won't talk
While insurers estimate that just 2 percent of mortgage holders typically wind up with force-placed insurance, virtually every mortgage servicer in the country has to deal with the problem. But lenders don't like to talk about the business.
Four of the nation's five largest mortgage lenders -- Wells Fargo, Bank of America, CitiBank and U.S. Bank -- declined interview requests. Bank of America, U.S. Bank and CitiBank also declined to answer written questions regarding commissions and other financial incentives tied to force-placed insurance. Wells Fargo said it receives "no financial inducements" on the business.
The New York hearing offered regulators a rare opportunity to engage industry executives about force-placed insurance. Robert Segnini, a senior vice president of Chase Insurance Agency, told regulators his company is doing what it can to reduce the frequency of force placements. He also said his company, a subsidiary of JP Morgan Chase, has stopped collecting commissions on the business.
When asked if the $663 million that JP Morgan earned from force-placed insurance created an "incentive" to keep homeowners in such policies, Segnini said "no," but conceded the point.
"I can see how somebody would think that."
Jeffrey Meitrodt • 612-673-4132