Force Placed Insurance: Tax Scam
Don’t be fooled! Large corporations are making/saving billions of U.S. tax dollars with the Force Placed Insurance Corporate Tax Scam.
When the Force Placed Insurance Tax Scam Begins
When property owners do not make a mortgage payment, allow their homeowners insurance policy to lapse, or the homeowners insurance company cancels their homeowners insurance policy, the lienholder (most likely a large corporate banking institution) places the property on Force Placed Insurance.
The Force Placed Insurance (Force Placed Coverage) is the minimum amount of property insurance required by the mortgage agreement. Force Placed Insurance does not protect the homeowner’s property or liability whatsoever! Any homeowners insurance policy, at worst, is the same as Force Placed Property Insurance and, at best, is much better and comprehensive. Assuming the worst case scenario (that the policies offer the exact same coverage) allows for an easier comparison of the insurance policies.
How the Force Placed Insurance Tax Scam Works
The lienholder/bank/mortgagor purchases Force Placed Homeowner Insurance Policies usually in two ways:
- Force Placed Insurance is purchased from an affiliate (in which the mortgage company partially or wholly owns the “subsidiary” that sells the Force Placed Insurance Policy)
- Force Placed Insurance is purchased from a third party insurance company (in which the lender has a strong “business partnership”) and results in accounting gimmicks, such as rebates and “kickbacks”.
Either path taken by the lienholder/bank/mortgagor results in what I consider to be fraud.
- Option #1: The lienholder sells the Force Placed Insurance Policy to an affiliate insurance company at an overpriced premium. In a foreclosure, this overpriced premium goes unnoticed by the property owner, and the bank racks up enormous direct and indirect “tax deductible losses”.
- Option #2: The lienholder sells the Force Placed Insurance Policy to a third party in which it has a strong business relationship. Accounting gimmicks are played and the leinholder receives a portion of the overpriced Force Placed Insurance Policy in the form of a “kickback/rebate”. This results in the lienholder economically benefitting from the overpriced policy premiums.
How the above mentioned Force Placed Insurance business practices are legal defies logic. For more information on a Force Placed Insurance lawsuits, please refer to my articles: JPMorgan Chase Faces Lawsuit Over Force Placed Insurance Policies or BNY Force Placed Insurance Lawsuit.
Why the Force Placed Insurance Tax Scam Works
The current U.S. corporate accounting laws regarding “losses” and tax deductibility provide an enormous incentive for the banks to engage in such “questionable” practices (fraud???). Almost always, these corporations do not even shop around for a more reasonably priced Force Placed Property Insurance Policy.
When consumers “give up” and stop paying their mortgage, they are not usually concerned with how much their lien amount (mortgage) increases. This allows the lienholder/banks/mortgagor to procure Force Placed Homeowners Insurance at ridiculous premiums. There are situations where the Force Placed Insurance Premium is 700% higher than a more comprehensive, alternative homeowner’s insurance policy.
Force Placed Insurance Corporate Tax Scam: The Numbers
According to data provider Lender Processing Services, approximately 6.9 million U.S. homeowners were either delinquent or in foreclosure through February 2011. According to Transunion, the rate of U.S. borrowers that were 60 days or more past due on their mortgage payments was 6.19% for Q1 2011 (1/1/11-3/31/11). The highest delinquency rates are in Florida: 14.37%!
The numbers used in the above exhibit are U.S. averages. The U.S corporate tax rate of 35% is for corporations that report annual taxable income in excess of $18.33 million (on a progressive basis). The above numerical analysis makes the assumption that foreclosure/delinquent properties are only subject to Lender Force Placed Insurance for one year (the national averages exceed one year). The numbers used within the above calculation are VERY conservative.