"Fannie Mae has limited ability to track premiums, claims, refunds, deductibles, and other key [force-placed] information," states a 2012 force-placed project brief summing up the "current state" of the market.
Bank and insurer advocates dispute the contention that the industry obfuscated, but concede that Fannie has been unable to obtain details on its force-placed insurance bills.
Fannie officials eventually resorted to scrounging through state insurance filings to find basic data about insurance written on its mortgage portfolio.
Fannie's data-gathering problem and its cost concerns stemmed from a common issue: The mortgage servicers who actually bought the force-placed policies weren't the ones paying for it.
Fannie officials eventually concluded that the simplest fix was for the GSE to buy insurance for itself. Such a move would cut banks out of the equation and enable Fannie to leverage its size into bulk discounts.
The GSE's staff briefed the FHFA on the idea on February 17 of last year and faced no objections, according to documents related to its force-placed insurance plan. Fannie issued a request for proposals to a dozen insurers about a month later. All were asked to design a program that saved money and increased transparency and competition.
The respondents ranged from smaller specialty insurance shops like Proctor Financial to Assurant and QBE, whose combined clients include 19 of Fannie Mae's 20 top servicers. The companies were supposed to design a model and provide a bid for doing the work.
The big players fared poorly. Assurant's proposal failed to meet the GSE's minimum requirements for consideration, Fannie documents show. The company declined to discuss its bid, but says it stood ready to work with the GSEs on possible force-placed insurance changes.
QBE did only slightly better; it came in last among four viable proposals. QBE quoted the highest prices, $1.01 in premiums per $100 of coverage. In the category of "Problem Solving/Innovation," it received a score of 0%. QBE declined comment for this story.
"The incumbents' proposals weren't serious," says a person familiar with Fannie's deliberations.
Smaller entities did better. The insurer American Modern offered the lowest rate, providing the same coverage as QBE at $0.73 per $100 of insurance. Fannie liked the plan but worried that choosing a single carrier would limit competition and concentrate risk.
The winner was OSC (a subsidiary of Breckenridge Insurance Group), a broker and services provider that proposed splitting Fannie's insurance among a group of insurers. At $0.80 per $100 of coverage, its rates were slightly higher than American Modern's, but OSC excelled at program design, Fannie concluded. It had also pulled off a coup by partnering with Zurich Insurance, a Swiss reinsurer with a $400 billion balance sheet, a superior A+ rating from insurance rating company AM Best and historical experience in the force-placed market.
Zurich stood ready to take on all of Fannie's business if necessary, but under OSC's model any qualified insurer could take a piece of the GSE's business by joining a consortium of carriers willing to divide Fannie's risk. Among the proposal's attractions were "market driven pricing," and "one entity fully accountable to Fannie Mae and servicers," Fannie documents state.
Fannie put thought into preventing excessive market disruption as well, the documents show. Incumbent insurers willing to match Zurich's prices would be permitted to retain existing business. If they didn't, banks could still hire them to administer force-placed programs. Insurers were also welcome to join the Zurich consortium.
Mortgage industry analysts praised the plan.
"It seemed like a clear way for the GSE (and hence the taxpayer) to save money," writes Laurie Goodman, a mortgage bond analyst for Amherst Securities, in an email to American Banker. "If Fannie was able to implement its plan, private label [mortgage security] investors would clearly be interested in replicating it."
Fannie showed the FHFA the various proposals and revealed its preference for the OSC/Zurich plan on May 9. The regulator raised no objections, according to sources and contemporary documents. Fannie sent the FHFA "final project recommendations" on September 28. A week later FHFA officials sat in on a meeting at which Fannie's risk management committee approved the OSC project. The FHFA also participated in calls on October 12 and 22 in which Fannie officials explained the plan to New York and Florida insurance officials involved in force-placed rate probes.
Although formal FHFA approval was the only hurdle remaining to the program, agency officials began asking questions that suggested unfamiliarity with the tenets of Fannie's plan: How much did Fannie spend on force-placed insurance? Why did Fannie pick the OSC consortium? Who approved the program? Could Fannie demonstrate that Zurich was a suitable counterparty?
By late December, however, the FHFA was asking Fannie for information that people familiar with the Fannie plan believed would be used to provide a final check-in with FHFA Acting Director Edward DeMarco.
"There were no real issues left," says someone familiar with the Fannie plan.
Fannie officials expected bank insurance industry advocates to push back against price cuts and market changes. But they figured that regulatory probes and bad press had severely hurt the industry's credibility and leverage.