The Federal Housing Financing Agency (FHFA) is seeking to ban on fees for so-called “force-placed” insurance policies.
The policies are for costly insurance coverage that borrowers are forced to take when their homeowners’ policies have lapsed, according to The Wall Street Journal. The ban would stop mortgage companies from accepting profitable payments in exchange for the controversial policies. Industry argues that the ban would intrude on state regulators; states are cracking down on these policies, the Journal reports.
According to Bloomberg.com, force-placed policies are arranged by lenders to protect collateral when homeowners coverage lapses. The FHFA intervention occurred over concerns that insurer commissions paid to banks was increasing policy costs and exposing both companies to litigation risks.
The FHFA is looking to stop those mortgage servicers that work with Fannie Mae and Freddie Mac from accepting specific payments, as opposed to putting rules in place on what insurers can charge for these policies, according to the Journal. This would, for the most part, ban the practice industry-wide given that about two-thirds of all home loans in the United States are backed by Fannie Mae and Freddie Mac.
The FHFA will likely ban two types of compensation from insurers to banks collecting borrower mortgage payments, including sales commissions for coverage with specific insurers and reinsurers in which the bank or mortgage servicer receives payment for taking some of the insurance risk, the Journal wrote. Meanwhile, insurance regulators in New York, California, and Florida have been working to drop costs for force-planned insurance with rate reductions and bans on insurer-paid fees. Many say that insurers and banks have become too cozy, leading to higher policy costs while preventing competition in the insurance industry, the Journal reported. Banks enjoy large profits from the fees insurers pay.
For their part, insurers argue that the cost of their policies is tied to the risk they must assume for issuing policies that may not involve property inspections and may also involve abandoned properties. Regulators have expressed concern that force-planned policies protect bank collateral in the event of serious property damage, according to the Journal.
Consumer advocates and state officials note that the force-placed policies are much more expensive than traditional homeowners’ coverage and that the continued use of these policies rose during the recent housing market meltdown, when approximately 3 percent of all mortgages were protected under the coverage, the Journal wrote.
Benjamin M. Lawsky, the New York Department of Financial Services Superintendent, talks about a “kickback culture” when describing the ties between insurers and banks. In fact, just this year, Lawsky put agreements in place with force-placed insurers operating in New York to, among other things, ban commissions and other payments, according to the Journal.
Assurant Inc. and QBE Insurance Group are the two key players in the force-placed insurance market, noted the Journal.