Say this for Edward DeMarco: the acting head of the nation's housing finance regulator is being realistic about the likely impact of the new homeowner insurance rules his agency announced Tuesday.
In a long-awaited move, the Federal Housing Finance Agency imposed restrictions on the ability of banks that do business with Fannie Mae and Freddie Mac to get paid for sending business to their partner insurance companies.
The market for such lender-placed insurance - which is also known as force-placed insurance - has been marked by extraordinarily high prices and kickbacks from insurance companies to banks' mortgage servicing arms.
In a news release Tuesday, DeMarco did not promise that the FHFA's new rules would bring down prices, although he said that was the goal. And he cast the agency's restrictions as an interim step.
"FHFA remains concerned about the cost of lender-placed insurance for Fannie Mae, Freddie Mac, and consumers," DeMarco said. "This directive is intended to reduce their costs as we consider additional measures."
Several sources who have been critical of the industry were skeptical that Tuesday's announcement would have a major impact on the price of the insurance nationwide, though they did say the new rules are better than nothing.
"This announcement doesn't do anything about the cost," said Marc Tanowitz, a principal at advisory services firm Pace Harmon who is an expert on the force-placed insurance market.
Lender-placed policies take effect after homeowners allow their voluntary insurance coverage to lapse. The policies are intended to protect mortgage investors. But in a market dominated by two insurance companies, Assurant Inc. and QBE Insurance Group, the mortgage giants Fannie and Freddie are often left bearing the cost of hefty premiums.
The FHFA's directive was short on details, but an agency spokesperson said that servicers will be barred from receiving commissions from insurance carriers. In addition, servicers will not be allowed to use their own affiliates to provide the insurance coverage under reinsurance agreements.
But the directive appears to continue to allow other ways for insurers to provide something of value to the banks that send them business. For example, the insurer may provide services to the bank for free or at a reduced cost.
"They've banned two of three common ways of funneling kickbacks. And they left the third one," said Mark Strauss, a lawyer at Kirby McInerney LLP who represents homeowners in a class-action suit over the insurance. "There's a gaping hole there."
Representatives of the banking industry did not appear overly concerned with the restrictions put forward Tuesday by the FHFA. That's likely because banks the handwriting has long been on the wall, and banks have been moving away from the kinds of commission arrangements and reinsurance deals that the FHFA is now banning.
For example, JPMorgan Chase (JPM) stated recently that it has discontinued commissions and ended its reinsurance arrangement with Assurant. In September the state of New York also placed strict restrictions on the terms of force-placed policies in the Empire State
Representatives of the banking industry did not appear overly concerned with the restrictions put forward Tuesday by the FHFA, saying that banks will find ways to adapt.
The FHFA's announcement Tuesday has been expected since March, when the agency first proposed restrictions on the financial arrangements between banks and insurers. The March announcement came on the heels of the FHFA's decision to kill a more comprehensive proposal by Fannie that was aimed at reining in the cost of the coverage.
Under that plan, Fannie would have bought the insurance directly, eliminating the ability of banks to collect payments by steering business to certain insurance companies. Fannie Mae estimated that the plan would have saved the mortgage giant and homeowners more than 30%.
Consumer advocates and other critics of the lender-placed insurance industry continue to call for a reform plan like the one proposed by Fannie Mae.
QBE declined an opportunity Tuesday to comment on the FHFA's plan.
An Assurant spokesman said: "We will learn more as the FHFA makes additional details available, but we believe the new lender-placed insurance program we have developed and implemented over the past several years should provide the flexibility to meet the needs of the GSEs and the industry, with significant benefits to homeowners, mortgage lenders and investors."