The American Bankers Association is asking Fannie Mae's regulator to halt a plan to slash the prices the housing giant and troubled borrowers pay for property insurance, citing a "lack of transparency and the absence of public input."
The banking trade group's Jan. 2 letter marks the industry's first public response to the Fannie plan, which was reported by American Banker in November. The public request that the Federal Housing Finance Agency submit the plan to a formal comment is an admission that only Fannie Mae's overseer can now delay or halt the government-sponsored entity's effort.
Fannie sources have said that the plan could save it and borrowers hundreds of millions of dollars on force-placed insurance. But it would cost banks dearly and unsettle the force-placed insurance market, according to the ABA. The plan "would dramatically alter existing servicing operations, contracts, and costs," according to the letter.
"We understand that Fannie Mae is proposing to require servicers to use a Fannie Mae-approved consortium of insurers that will purportedly provide significant discounts in insurance premiums," the ABA letter says. "We strongly encourage FHFA to request public comment on the initiative."
Force-placed insurance protects the creditor banks when financially troubled homeowners allow their voluntarily-purchased hazard insurance to lapse. Banks bill homeowners for the premiums, which cost far more than voluntarily-purchased policies. In cases where homeowners default, mortgage servicers pass along the unpaid costs of force-placed coverage to mortgage investors and guarantors such as Fannie Mae.
Nothing about force-placed insurance, also known as lender-placed insurance, is inherently controversial. But banks and the country's two dominant force-placed insurers, Assurant (AIZ) and QBE, have come under fire from consumer advocates and regulators for close financial arrangements, including the payment of alleged kickbacks.
Previous reports by American Banker found that banks sometimes performed no work in administering force-placed programs, yet received commissions of 15% or more on the insurance's sale. Borrowers and investors like Fannie Mae, meanwhile, ended up paying for insurance that cost multiples of what superior, voluntarily-purchased policies would cost. Consumer advocates and mortgage investors blame the insurance's high price for pushing borrowers into foreclosure and worsening the severity of losses on defaulted loans.
Once a tiny, niche business, force-placed insurance became a controversial, $6 billion-a-year industry as foreclosures boomed. Over the last year, insurance commissioners in New York, California, and Florida have seized on these criticisms, grilling insurers and servicers on their financial arrangements and demanding rate reductions of as much as 30%.
As the nation's biggest insurer of home loans, Fannie Mae has also taken an interest in bringing down the cost of force-placed insurance for it and its borrowers. Last spring, the government-backed mortgage giant first sought to ban banks from accepting commissions on policies and then pursued its plan to directly purchase force-placed insurance on the loans in its portfolio, thereby cutting out banks. Pivotal to its plan is consortium of insurers, including Zurich Insurance Group, a massive multinational carrier with a history in the force-placed business, which have already agreed to provide insurance on Fannie loans at prices 30% to 40% less than those of the incumbents.
Supporters of Fannie's plan who have spoke to American Banker have voiced frustration that the GSE's financial conservator has not yet approved the program. Fannie considers it an obvious vendor-management decision that would save it hundreds of millions of dollars, they say. The FHFA declined to comment for this story.
Even as insurers have agreed to steep rate cuts imposed in key states, they have argued that an overhaul of the industry would be unproductive and disrupt the existing market. In an interview last year, ABA insurance director Kevin McKechnie argued that commissions were standard practice in other sectors of the insurance industry.
"It isn't like force-placement is without cost" for banks, he said.
In the letter to the FHFA, McKechnie and fellow ABA vice president Robert Davis alleged that Fannie had reached out to only a small number of insurers and servicers when formulating its plan, something that sources familiar with the Fannie plan emphatically deny. Dictating the insurers which banks use would restrain competition, they argued.
"The proposal, if adopted, effectively would allow Fannie Mae to pick winners and losers among insurers," the letter states.