Fannie Mae hopes to banish banks from any involvement in the purchase of force-placed insurance under a plan to lower the cost of the product, according to a copy of a request for proposals obtained by American Banker.
The move comes in the wake of reports of widespread self-dealing and kickbacks in the force-placed insurance market. Fannie responded to those reports in March by announcing its intention to replace traditional force-placed insurance on the loans it guarantees with policies acquired from providers of its choosing.
Force-placed insurance is a form of home coverage that mortgage lenders and servicers buy when homeowners allow their conventional policies to lapse. As first reported in American Banker, cozy relationships between banks and insurers are believed to inflate prices, burdening struggling homeowners and increasing the losses suffered by Fannie Mae and other mortgage investors.
"[M]uch of the current Lender Placed Insurance cost borne by Fannie Mae results from an incentive arrangement between Lender Placed Insurers and Servicers that disadvantages Fannie Mae and the homeowner," states the document, which can be viewed here. "This RFP is designed to change this situation."
Fannie Mae announced the existence of the RFP in March but declined to make the document public. The GSE is the largest holder of mortgages in the country, and its efforts could effectively restructure a large chunk of the force-placed market.
Under virtually every mortgage contract, homeowners are required to insure their homes to protect the lender's investment. Mortgage servicers currently contract with specialty insurers to monitor whether borrowers maintain coverage and issue replacement policies if they do not. As little as a quarter of premiums go toward paying claims, according to evidence unveiled by New York Superintendent of Financial Services Benjamin Lawsky at a hearing last week.
Fannie's RFP would cut banks out of the sales process, but the document shows that Fannie Mae has grander ambitions. The RFP would require insurers to bid separately for subcomponents of the force-placed business, reducing the potential for insurers to sell policies aggressively and to lump administrative costs into the premiums they charge.
The RFP requires insurers to justify their rates to Fannie Mae, tacitly suggesting that the GSE does not believe state insurance regulators have met their obligation to prevent abusive pricing of force-placed policies. Under the RFP, Fannie would take on that role, scrutinizing insurers' actuarial assumptions, premium revenue, and losses.
"Monthly management report shall include at a minimum, monthly net written premium, number of claims paid and cost at the loan level, claims denied and why at the loan level and loss ratio at the state level," the RFP states.
The proposal would disaggregate many insurer functions that are currently tied together. Bid respondents are asked to: submit separate proposals for monitoring loan portfolios for lapsed policies; prod borrowers to obtain voluntary insurance; and provide coverage. By asking insurers to sell their services a la carte, the GSE hopes to prevent ancillary services from being subsidized through premiums.
"Fannie Mae is often paying twice for Insurance Tracking services; once via the servicing fee that Fannie Mae pays to Servicers, and again via the Lender Placed Insurance premiums, since those premiums may include or subsidize the costs of tracking services," the document says.
The document was issued on March 6 with what appears to have been a great sense of urgency by Fannie Mae. Responses were due 17 days later.
"Due to the tight timeframes under which Fannie Mae is operating, please note that incomplete or late proposals may not be considered," the GSE wrote.
The RFP contains some indication that Fannie Mae was still considering various options regarding certain aspects of its program. The document contains sections in which it asks respondents to suggest alternatives "that would help Fannie Mae to achieve the goals as stated in this RFP."
There are also other indications that Fannie's efforts on force-placed insurance are still in flux; on Wednesday the GSE issued a reprieve on a new guideline that barred mortgage servicers from passing on to Fannie Mae the cost of their commissions. The terse statement asked banks to "implement as many of the requirements as practically feasible," even though Fannie Mae would no longer implement the rule on June 1 as previously planned.
Both Fannie and the Federal Housing Finance Agency, the GSE's overseer during its conservatorship, declined to discuss the RFP or its outcome.
"We fully support policy efforts to reduce lender placed property insurance costs," A spokeswoman for the FHFA said that
The number of entities that responded to the RFP is also unknown. Given that two companies, Assurant and QBE Insurance, handle more than 90% of the force-placed market, some analysts and observers have expressed skepticism that they would cooperate with plans to reconfigure the business. Assurant said that the company had submitted a proposal, according to a company representative.
"[We] believe we have solutions that can meet the needs of the industry going forward," a spokeswoman said.
QBE did not respond to a request for comment.
American Banker would like to know what industry participants and observers think of the structure Fannie's proposed. Please send a note to the author, or better yet, leave a comment.