I just received an email from a past client who's about to go through a foreclosure on a house I sold him (email below). He's also a friend. I'm not really sure how to answer him, but I really don't think there are criminal ramifications to the plan he outlines below. Civil, maybe. How would you answer this email? Any of you ever heard of a situation like this?

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...foreclosure on the home you sold us is eminent. (Name redacted) and I have accepted it. Even embraced it. We've made other living arrangements with which we are happy. Suffice to say that although we've unsuccessfully attempted a loan mod arrangement, the fight is now over and we're simply walking away.

However, the thought recently occurred to me that I could monetize this situation. Setting aside morality issues for a second, I'd like to pose a question in a legal light: Can I go ahead and cancel my insurance policy during the pre-foreclosure process and pocket the money without legal repercussions? Have you ever heard of any of your past clients doing this? Or anybody for that matter?

Now, there are a few facts that about our specific case which may influence the answer to this question.

1) This loan is with BOA.

2) Our insurance is escrowed.

3) Due to the length of our non-payment, there wasn't any money in our escrow (in fact, it was negative) when BOA paid our insurance on our behalf. (This fact gives me pause for consideration with regard to going through with the cancellation).

4) This is not a forced policy. It's with the insurance company we originally chose.

5) I'm not concerned about coverage on our contents since we will be vacating very soon.

6) We have not yet been served, but I know it's forthcoming soon due to a form letter that I recently received. Plus, we haven't made a payment in a REALLY long time.

So what do you think? Would there be any potential criminal repercussions? Or just civil? Also, can I be assured that if I cancelled the policy that the refund check would come to us? Is it possible that when BOA paid this out of their pocket (due to no money in my escrow), they alerted the insurance company that if the policy is cancelled to send the refund to them?

He's asking for legal advice not real estate advice. No way would I jump into the middle of this.

I don't know much about South Carolina, except that it's probably located down there below North Carolina; but I think if the Mortgagee is identified as the 1st Lienholder on the Policy, then the Policy cannot be canceled without the Mortgagee first being notified . . . . and given the opportunity to pay the Premium to keep the Insurance in force and thus, protect their interests. That's standard protocol.

I can't imagine the Insurance Company issuing a Refund Check directly to the Mortgagor under these circumstances; since the Mortgagee is the one who has been paying the Premium . . . . but stranger things have happened.

In the whole scheme of things, aren't we talking "small potatoes" here?

Good point, Vermont. Yes, the mortgagee will certainly be notified upon cancellation, however the premium is already paid. So it's not a matter of paying to extend coverage. My understanding is that it's the insured's (i.e., borrower's) right to cancel or not cancel. I'm sure the lender will force place a policy, though. I guess the bigger issue here is whether the lender will have legal recourse due to the fact that the policy came out THEIR pockets (due to no money in escrow from lack of payment) if, in fact, the refund goes back to the borrower (which is another good point you raised...that is, where will it ultimately go?).

Depending on State Law in South Carolina; and depending on how the Policy is written; and depending on how the Mortgage is written . . . . your Friend MAY have some "right" to Cancel the Policy.

But that "right" is probably contingent upon getting permission of the Mortgagee who will be looking to see that adequate replacement Coverage has been obtained . . . . and, once again, that they (the Mortgagee) is identified as the 1st Lienholder on the replacement Coverage.

I'm not in Insurance . . . . but I did receive some formal training as a Property/Casualty Underwriter . . . . and I can tell you it's highly unlikely that your Friend will ever succeed in spending any of that money! The Lending Institutions and Insurance Carriers don't leave much room for this possibility in between their interlocking procedures in these matters (there's no light between them). But your Friend can still try.

This WebSite has an Insurance Forum where your questions might catch the eye of someone far more knowledgeable than I; but I think your Friend might be grasping at straws here.

Fair enough. Thanks for your insight, Vermont!

Vermont makes some very good points.

In a normal situation when an owner is current on payments & switches insurance co's mid-way & payments are escrowed, the mortgagee, is usually the one that issues a pro-rated refund.

If the owner cancels, in a situation like this, the mortgagee would almost def issue forced place insurance. FPI is usually more expensive, so doubt there would be a refund, anyway. And it may come back to bite the owner if you're in a Judicial F/C state. Esp if the bank can go after the owner via judgements later on.

Since the owner is not current on payments, any extra buck would normally be appliaed to late payments, or the escrow account.

Personally, as an agent, I wouldn't touch this one, though. Way too much liabilty. The next thing the owner will be asking is if it's OK to remove appliances & fixtures.

***I am not a lawyer, nor do I play one on; TV, Radio, YouTube, any SmartPhone Apps, F/B, Twitter or anyplace else for that matter. This is not legal advice.***

Your seller is wasting their time trying to out think themselves.Forced placed insurance is very expensive and does not cover the valuables of the seller only the structure for the bank.

Where a policy you buy is 500 a year on a 150k house a forced placed policy can be 1,800 a year for the same 150k house.They don't go buy market value but what it would take to rebuild from scratch. Example you can buy a 75k foreclosure in the subdivision but to build new it would take 130,000.

Seller needs to look at negotiating a bunch of money for cash for keys instead or if the amount is small then milk the bank after foreclosure for months of free rent until they can evict them out.

Some states it takes a very long time after foreclosure to get the holdover tenants out(former owners).They can use this in negotiations with cash for keys.

No legal advice.

I would just send them a quick blurb about cash for keys or milking for free rent and checking on eviction time lines and say you can't give legal advice.