When a borrower signs a mortgage contract, the lender acquires an ownership stake in the house as collateral for the loan. To protect its financial interest in the property, the lender requires the borrower to maintain insurance on the property. The insurance provides necessary protection should the property incur any damage that would impact its value – such as damage caused by a fire or a hurricane. To fulfill this obligation, most borrowers buy homeowners insurance using an insurance company of their choice. If for any reason the borrower’s insurance should lapse, the lender can purchase insurance on the property and charge the expense to the borrower who agreed to maintain the insurance protection of the property. This is called lender-placed insurance or “LPI.”
LPI rates tend to be higher than rates for borrower-purchased insurance. This is because a borrower can have an insurance company specifically assess the risk to their property – this is known as underwriting. With LPI, property- specific underwriting is not able to occur. Instead, the cost of LPI reflects the cost of all properties in the lender’s mortgage portfolio that have defaulted on their insurance obligation. This pool of higher risk properties results in the insurance rates charged to the lender – which is passed on to the borrower as part of their mortgage obligation.
Assurant is the US’s largest provider of lender-placed insurance. We are proud of the important risk management value we provide to support homeownership in the United States. That’s why we asked Oxford Economics to analyze our product and provide more information about its role in the complex US mortgage market. Oxford also studied the relationship between LPI and the socioeconomic consequences of a natural disaster. Oxford’s findings show that following a natural disaster, the presence of LPI is associated with lower debt to income ratios, fewer mortgage delinquencies, and lower federal disaster recovery spending. And, while LPI is placed on borrowers whose required insurance has lapsed, the sometimes-higher cost of LPI does not cause those borrower’s to become delinquent on their loan. Instead, because LPI is a risk management safety net for the lenders and homeowners, it has a positive impact on mortgage approvals and helps borrowers to protect their equity when they may have fallen on difficult financial times.
To learn more about the Oxford Economic’s analysis, please download the PDF below.