The watchdog agency charged with overseeing Fannie Mae, Freddie Mac and their regulator is planning a review of their efforts to rein in the cost of force-placed insurance , according to two sources familiar with the matter.

The outside probe will be conducted by the inspector general that oversees the Federal
Housing Finance Agency, the GSEs' regulator. It is unclear what exactly the review will cover, but it comes in the wake of the FHFA's decision in February to kill a Fannie Mae plan that consumer advocates say would have sharply lowered the cost of force-placed insurance.

The FHFA has also faced recent criticism for hiring an insurance industry lobbyist to advise it on force-placed insurance matters.

A spokeswoman for the inspector general's office said that the agency is "undertaking a survey of Fannie Mae's and Freddie Mac's force-placed insurance guidelines and reimbursements" and that it has notified FHFA of the inquiry.

"As we are in the preliminary stage of this review, neither the scope nor details have yet been determined," the inspector general's spokeswoman, Kris Belisle, said in an email Friday, responding to questions from American Banker.

Spokespeople for the FHFA, Fannie and Freddie declined to comment on the watchdog agency’s inquiry.

Force-placed insurance is a backup form of property insurance that banks buy when homeowners allow their voluntary policies to lapse, in order to protect the interests of mortgage investors. The product's reputation has been marred by apparent kickback schemes, in which banks paid inflated prices for the insurance but got much of the money back through unearned commissions and other arrangements.

Some of the cost of the inflated premiums has been passed along to mortgage investors like Fannie and Freddie, and ultimately to U.S. taxpayers, since the federal government essentially owns the two mortgage giants.

The Fannie Mae plan would have provided homeowners insurance from Fannie's own vendors, eliminating the ability of banks to collect payments by steering business to certain insurance companies. A proposal document obtained by American Banker earlier this year stated that the Fannie Mae proposal would have produced savings in excess of 30% for Fannie and homeowners.

But in February, the FHFA rejected Fannie's plan.

The agency's decision drew sharp criticism from consumer advocates, who alleged that the FHFA buckled under pressure from insurers and bankers.

"Incompetence or corruption. It's got to be one or the other," Robert Hunter, a consumer advocate and former Texas insurance commissioner, said shortly after the decision was announced.

The FHFA rejects those assertions but has been publicly vague about the reasons for its decision. For example, the FHFA's acting director, Edward DeMarco, has stated that the agency rejected Fannie's plan in favor of "a broader approach, bringing together federal and state regulators to participate in the dialogue with us and with a wide range of stakeholders."

But privately the agency has argued that Fannie Mae’s process for developing its plan was not transparent enough, and has expressed concern about Fannie’s ability to transition to the new system, according to a source familiar with the FHFA’s rationale.

In March, the FHFA proposed regulations that would ban certain sales commissions and reinsurance arrangements that have allowed banks to recoup much of the money they paid in insurance premiums.

That proposal, which is seen by consumer advocates as something of a half-measure, because there it doesn’t ban every method of sharing profits between insurers and banks, has languished for months. An FHFA spokesperson declined Friday to commit to a timeline for finalizing the regulations.

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