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The loosely-affiliated hacker group Anonymous has claimed it had evidence of fraud carried out by Bank of America. At midnight last night, the group published a cache of internal e-mails by a whistleblower and former employee of Balboa Insurance, a recently-sold subsidary of Bank of America. The whistleblower made a number of allegations about Bank of America and its subsidiary which, at first blush, were jargon-laden and difficult to understand.

The crux of his allegations involved an arcane practice known as force-placed insurance scams, which involves lienholders, loan servicers, escrow accounts and other home loan-related jargon. The density of his words were frustrating enough for some to dismiss him as a "whiny former employee."

However, a number of prominent financial bloggers such as Abigail Field at Daily Finance, Yves Smith at Naked Capitalism and Seeking Alpha's Daily Bail are giving credence to the whistleblower's allegations calling them "all too credible."

But first it takes explaining what a force-placed insurance scam is. For that, Seeking Alpha has the clearest definition:

When someone holds a mortgage, they are required to have adequate insurance for the property. But if they stop making the payments on their insurance policy, the lender may purchase insurance on the property on behalf of the borrower (to protect the lender) and are then allowed to charge the mortgage holder for that insurance. This is called Force-Placed Insurance and usually it costs a great deal more than ordinary homeowners insurance because of the greater risks involved. The forced insurance, it should be noted, protects the lender, but not the borrower. This is standard practice in the mortgage industry, but sometimes things get a little murky. In fact, they sometimes get downright dirty.

In many cases, when homeowners begin missing payments on their mortgage, servicers will stop forwarding insurance payments (which have been held in escrow) to the insurance company on behalf of the borrower. This has occurred even when the borrower has paid enough into escrow to cover the insurance payment. Nonetheless, this automatically kicks in the Force-Placed Insurance process. The servicer will then purchase the insurance and charge the homeowner for it. The insurance so purchased is always several times more costly than ordinary insurance, thus putting even more stress on the delinquent borrower, often driving them even more quickly into foreclosure.

How is Bank of America's subsidiary involved in this? Here's what the whistleblower alleges:

Balboa Insurance Group, and it’s largest competitor, the market leader Assurant, is in the business of insurance tracking and Force Placed Insurance (aka Lender Placed Insurance, FOH, LPI, etc). What this means is that when you sign your name on the dotted line for your loan, the lienholder has certain insurance requirements that must be met for the life of the lien. Your lender (including, amongst others, GMAC, Aurora Loan Services [a subsidiary of Lehman Bros Holdings], IndyMac Federal Bank [a subsidiary of OneWest Bank], Saxon, HSBC, PennyMac [a collection agency started by former Countrywide Home Loans executive Stan Kurland after CHL and Balboa were sold to BAC], Downey Savings and Loans, Financial Freedom, Select Portfolio Services, Wells Fargo/Wachovia, and the now former owners of Balboa Insurance themselves…Bank of America) then outsources the tracking of your loan with them to a company like Balboa Insurance.

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….

Can the leaker be trusted? Daily Finance's Abigail Field grappled with the issued and, in the end, decided yes:

As to the leaker's credibility, Naked Capitalism's Yves Smith notes that he makes a number of typos and also uses some terms incorrectly, saying "lienholder" when "servicer" is clearly meant. Nonetheless, Smith finds the allegations credible. So do I.

Meanwhile, Seeking Alpha focuses on the collusion that can be involved in force-placed insurance scams:

It gets worse when you consider that many of these same insurance companies are known to give kickbacks to the servicer, or the servicing bank as the case may be, thereby incentivizing delinquencies (e.g. through HAMP), which can entail the lapse of homeowners insurance. 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.

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