The Federal Housing Finance Agency earlier this year killed a plan by the mortgage giant Fannie Mae to slash the cost of force-placed insurance. Now the agency is planning to convene hearings to learn more about the force-placed market — in private.
The meetings, slated for Thursday and Friday in Washington, are open only to "stakeholders," defined by the FHFA as big banks, insurers, insurance brokers, fellow regulators and representatives of trade and consumer groups. A copy of the agenda can be viewed here.
Representatives from Fannie Mae will be allowed to attend the meeting, but have been forbidden by the FHFA from speaking or asking questions, say two sources who asked to remain anonymous to avoid angering the FHFA. Asked about the FHFA's prohibition, Fannie Mae, the country's largest purchaser of force-placed insurance, declined to comment. A spokesman for the FHFA also declined to discuss the request that Fannie not actively participate.
Given the FHFA's oversight of Fannie Mae and Freddie Mac — which guarantee 31 million home loans and cover a significant portion of force-placed insurance premiums- the federal conservator could play a key role in determining future industry practices.
"This is an information gathering and fact finding endeavor," said FHFA general counsel Alfred Pollard in a statement emailed to American Banker. "The attendees will not be asked to reach a consensus on any decisions or recommendations regarding any future course of action."
The hearings come at a tumultuous time for force-placed insurance, a form of backup property insurance that is supposed to protect Fannie, Freddie and other mortgage-backed securities investors when borrowers allow their conventional hazard policies to lapse. Banks are responsible for "force placing" the replacement coverage and then typically pass along the cost to homeowners and investors.
State regulator, plaintiffs' attorneys and Fannie Mae have alleged over the past two years that the force-placed market is riddled with pay-to-play kickback schemes in which banks paid inflated prices for the insurance and then and in return received lucrative commissions or sweetheart reinsurance deals from the underwriters. Such arrangements have been criticized for driving up the cost of force-placed coverage and sticking third parties with the bills.
Filings with the National Association of Insurance Commissioners show that a reinsurance affiliate Banc One, a subsidiary of JPMorgan Chase (JPM), earned more than $300 million reinsuring 75% of the premiums its borrowers paid last year, paying out only a fraction of that in claims. Such lucrative arrangements have created "reverse competition" by rewarding banks for buying the most expensive insurance possible, consumer advocates say.
"Over the 2010 to 2012 period, Assurant [one of the largest force-placed underwriters] passed almost $6 billion of premiums to captive reinsurance companies, but collected just $2 billion in claim payments," six consumer groups wrote in a letter to the FHFA.
Assurant disputed those numbers, noting that they included captive reinsurance arrangements in other Assurant lines of business such as credit insurance. The company says that captive reinsurance deals for its specialty property unit — of which force-placed insurance is the largest part — totaled $2.2 billion over those three years.
"The reinsurer is accountable for a pro rata amount of the losses from the 'first dollar,' and therefore receives no benefit, other than as a participant in the LPI business (including in both profits and losses), and is treated no differently than any non-Servicer affiliated reinsurer would be," the company wrote in a letter to the FHFA.
New York state has already banned such payments. Florida regulators have expressed concern about the same issue, although the state recently approved rates for QBE, another large force-placed insurer, despite its payment of commissions to banks that provide it with business.
"I don't know why [major insurers] wouldn't agree to the same thing in Florida that they agreed to in New York," says Belinda Miller, general counsel for the state's department of insurance regulation.
Florida is the country's largest force-placed insurance market, comprising about 30% of the national total in recent years. But no state has as much clout as Fannie Mae and Freddie Mac, the government sponsored enterprises which together guarantee more than 30 million home loans, or around half the U.S. mortgage market.
The FHFA's authority over Fannie and Freddie gives it tremendous power over the force-placed practices of large banks, but it has done little to date. Earlier this year, it killed a plan that Fannie Mae executives said would increase competition and save it hundreds of millions of dollars. Fannie's plan involved purchasing force-placed coverage directly from a range of insurers.
Because a consortium of major insurers had already agreed to provide Fannie Mae with insurance at a 30% discount, the FHFA's move shocked consumer advocates and even some industry observers.
"Incompetence or corruption. It's got to be one or the other," said Robert Hunter, a former Texas Insurance Commissioner who now works for the Consumer Federation of America, at the time.
In March, the FHFA proposed banning the use of commissions and reinsurance in the force-placed market. It is yet to explain how its proposal would directly cut costs. The FHFA intends to delay collecting force-placed industry data until it launches a broader mortgage data push one year from now, according to an outside attorney hired to help guide the agency's force-placed efforts.
Asked about its timeline for reviewing force-placed insurance practices, the FHFA did not comment. Critics interpret the FHFA's leisurely timeline as indicating it's in no rush to enact reforms.
"That would pretty much just kill it," says one of two sources who told American Banker of the agency's time frame.