Posted on 26 Mar 2013 by Neilson
A U.S. housing regulator is cracking down on a little-known practice that has hit millions of struggling borrowers with high-price homeowners' insurance policies arranged by banks that benefit from the costly coverage.
The Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae and Freddie Mac, plans to file a notice Tuesday to ban lucrative fees and commissions paid by insurers to banks on so-called forced-placed insurance.
Such "forced" policies are imposed on homeowners whose standard property coverage lapses, typically because the borrower stops making payments. Critics say the fee system has given banks a financial incentive to arrange more expensive homeowners' policies than necessary.
Banning the fees and commissions could help lower the price of the insurance policies. The housing agency's move would apply nationwide to all mortgages guaranteed or owned by Fannie and Freddie-about half of the housing market.
Forced policies have boomed in the wake of the housing bust, as many homeowners struggled to keep up with mortgage payments. Some borrowers may try to save money by dropping the original standard coverage, only to be hit by policies with premiums that are typically at least twice as expensive as voluntary insurance, and sometimes cost as much as 10 times more. Nearly six million such policies have been written since 2009, insurance industry data indicate. Consumers are free at any point to replace a forced-placed policy with one of their own choosing.
Property insurance generally is required to secure a mortgage and protects not only the homeowner's investment but also the lender's.
Regulators say some consumers don't read warning letters that they will be subject to potentially more-expensive coverage if they don't restore their original coverage or line up some other homeowners' policy.
They only realize months into the new arrangement that the amount they are being billed is much higher than they previously paid for coverage.
Banks and insurers maintain that consumers are given adequate notice. But state and federal regulators are concerned that prices of the policies are being artificially inflated because of financial relationships between banks and insurers.
Some banks have stopped receiving commissions as scrutiny increased over the past couple of years. Still, many share in the estimated $2.6 billion in annual premiums through bank-owned reinsurance companies.
New York regulators last year found nearly 15% of the premiums from force-placed policies flow back to the banks. Banks' commissions on the force-placed policies frequently top more than 10% of the homeowners' annual premiums of about $2,000, according to regulators.
The FHFA's planned notice, which was viewed by The Wall Street Journal, will be submitted to the Federal Register. The agency will seek public input for 60 days but noted the force-placed industry's compensation practices are "sufficiently distinct as to merit early action." The FHFA could make adjustments to the rule based on comments from mortgage-industry players.
The issue is important to Fannie Mae and Freddie Mac because they pick up a large portion of the bill for unpaid insurance costs. Fannie Mae is annually spending $390 million for the insurance, with another $110 million paid by borrowers, according to a 2012 internal presentation viewed by the Journal. The FHFA, in its planned notice, said demand for force-placed policies has risen since the financial crisis, driving up costs to Fannie and Freddie.
Last month, the FHFA rejected a plan by Fannie Mae to cut the costs of the insurance by 30% to 40% by bringing in a group of insurers to inject more competition in the market. That approach would have applied only to Fannie Mae, and the regulator wanted to establish a broader approach that would apply to the entire housing market, Edward DeMarco, the FHFA's acting director, has said.
Banks and the insurers have defended the fees and premiums as appropriate for the costs and risks they incur in arranging coverage. Insurers maintain the insured properties often are vacant and uninspected, and many are in hurricane-prone Florida.
A spokesman for Assurant Inc., the largest seller of the insurance in the U.S., said: "It would be premature to project what FHFA might do regarding lender-placed insurance. We've worked with Fannie and Freddie for years, and look forward to continuing to work with them and FHFA as they look to control costs and help move the industry forward." A spokeswoman for QBE Insurance Group, the other major player, declined to comment.
Last week, Assurant agreed to pay a $14 million penalty and provide restitution to some New York homeowners to settle state allegations of overpriced insurance and excessive profits. New York Gov. Andrew Cuomo said the pact addresses an "intricate web of relationships between insurers and banks" pushing some homeowners into foreclosure.
In an example cited by the state in its announcement last week, New York regulators said J.P. Morgan Chase & Co. "has made approximately $600 million since 2006" through reinsurance transactions with Assurant.
A J.P. Morgan spokeswoman described the bank's arrangement as a "risk-sharing relationship," meaning it profited by taking on some underwriting risk. She said J.P. Morgan receives "no commissions" from Assurant.
"We continue to work with regulators to deliver collateral insurance in the best way possible," said Kevin McKechnie, executive director for the American Bankers Association's office of insurance advocacy. The New York action, he said, "could limit the number of servicers and force smaller institutions out of the business, which would have a negative impact on consumers."