Patrick Rodgers, who sued Wells Fargo and won.

Remember when I wrote last month about a Philadelphia music promoter who sued Wells Fargo -- and won the right to auction off their property?

I couldn't figure out why Wells Fargo was forcing this replacement-value insurance policy on the guy:

Rodgers made all his mortgage payments on time, but Wells decided out of the blue that he had to carry insurance for the full replacement value of his home -- $1 million -- and started to charge him an extra $500 a month in premiums. When Rodgers sent a formal letter to the lender questioning this, they did not answer in good time, so a court awarded him $1,000 in damages, which Wells wouldn't pay. So the court is allowing him to sell the contents of the lender's office to make good on the bill. [...] "It's a completely unreasonable demand," says Irv Ackelsberg, a mortgage expert at the Philadelphia law firm Langer, Grogan & Diver. "Their interest is in protecting their mortgage, not ensuring that the house is rebuilt." Rodgers' next step put him at some risk, he concedes now. He refused to renew the higher-cost policy. Instead, Wells Fargo bought him so-called forced-placement insurance - a policy that typically costs much more than ordinary coverage and only protects the mortgage-holder's interests.

It took a couple of days after the Anonymous leak for the contents to sink in, but I finally connected the dots. Rodgers was more than a victim of bank abuse -- this was systematic outright fraud throughout the mortgage and banking industry. It wasn't just Wells Fargo.

Here's what Jeff Horwitz points out in the November 2010 issue of American Banker:

Bank of America Corp. owns a force-placed insurance subsidiary, and most other major servicers receive commissions or reinsurance fees on the very same policies they purchase on investors' and borrowers' behalf.

Court documents show that a subsidiary of the country's largest specialty insurer paid undisclosed "commissions" for the rights to a servicer's force-placed business.

State court filings show alleged abuse in which banks charged borrowers for unnecessary insurance and backdated policies providing coverage retroactively. Often the insurance was acquired only after banks stopped advancing the premiums of delinquent borrowers' escrowed policies, causing those cheaper and more comprehensive policies to expire. In response to questions from American Banker, federal and state officials said that some practices that industry trade groups defend may not be legal.

Foreclosure defense and legal aid attorneys say force-placed insurance is found on most of the severely delinquent loans in this country. If so, the cost to investors may well be in the billions of dollars.

With little regulatory oversight or even private investor awareness, force-placed insurance has helped make drawn-out foreclosures lucrative for servicers — far more so, in some cases, than helping a borrower return to performing status. As the intermediary between borrower and investor, servicers appear to be benefiting themselves at the expense of both.

Horwitz says JPMorgan Chase wouldn't tell him what insurance company they used for reinsurance, but figured out that Assurant's annual report "describes precisely such a relationship from an insurer's perspective."

In an effort to align its interests with its servicer customers, the company will often reinsure the policies it writes with the same servicer that requested them. "Such arrangements allow significant flexibility in structuring the sharing of risks and profits on the underlying business," Assurant notes. The interests of the two parties are so aligned, in fact, that in many cases there ceases to be a clear difference between the entity purchasing insurance and the entity selling it.

So if it's accurate, the Anonymous leak is the smoking gun in this mess. Because it indicates from Bank of America's own internal documents that this was intentional fraud for profit, and explains just why mortgage companies were dragging out the foreclosure process -- and refusing modifications.

They were making so much more money on the re-insurance policies, it didn't pay to modify.

The Daily Bail, writing at Seeking Alpha:

It also becomes clear that the interests of the servicer and the insurance company are aligned against the interests of both homeowners and investors. This is because servicers in many cases are reimbursed for the insurance they purchase on behalf of borrowers out of the proceeds of foreclosure sales, foreclosures which they helped bring about through overly expensive force-place insurance policies. That is, the servicers get paid before investors and by over-charging for the insurance in the first place the servicers are able to extract even more money from the investors they are supposed to be working for. Where the situation gets really interesting is when a bank like BofA actually owns the insurance company, as in the case of Balboa. In this email, the Balboa employee appears to be saying that errors in tracking of mortgages were common, but that he had more incentive to blame outsourced clerical workers for errors, thereby reducing the fee Balboa paid to the other company for handling the paperwork, than he had incentive for actually preventing such errors in the first place:

It isn't clear what kind of "system glitch" the employee is referring to, but presumably it is a glitch related to lapsed insurance payments. If it is the case that Balboa/BofA was knowingly allowing servicing errors to occur, so that they could then force-place insurance policies on borrowers, then that in itself could be a huge blow to BofA -- in addition to the perhaps related issue of allegedly trying to erase DTNs on scanned documents.

Yves Smith at Naked Capitalism:

Um, he names a long list of servicers, not lienholders, but we’ll continue. Balboa makes some money by charging these companies to track your insurance (the payment of which is factored into your loan). If you do not meet the minimum insurance requirements set by your lienholder, Balboa Insurance places a force placed insurance policy on your loan. You are sent a letter telling you that you do not have insurance, and your escrow account is then adjusted for the inflated premium of a full coverage policy placed by Balboa’s insurance tracking group, run by Steven Ramsthel, Sr Vice President of Loan Tracking Operations & Customer Care at Balboa Insurance Group…. The release also alleges that regulators were complicit (click to enlarge):