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Evidence of abuses and self-dealing in force-placed insurance suggests there may be far larger problems in how servicers are handling home loans than sloppy document recording.
November 9 -
Private mortgage insurers brought some rowdy lenders to the real estate party of the last decade. Now the insurers may be making it easier for some of their guests to skip out on the cleanup.
September 21
To maintain an important inducement for mortgage putbacks, Freddie Mac has warned its seller-servicers to stop cutting side deals with mortgage insurers.
Under the settlement agreements at issue, mortgage insurers have been agreeing not to rescind letters to seller-servicers for mortgages owned by Freddie Mac.
The reason Freddie Mac is upset about the settlement agreements is that it had been depending on insurers to help spot mortgages that did not meet the government-sponsored enterprise's underwriting guidelines when they were written. When a mortgage insurer rescinded coverage it gave the GSE a red flag for a putback to the servicer or the originator of the loan.
"These arrangements are neither authorized or contemplated in the Freddie Mac seller-servicer guide and go beyond the authority the guide does provide," said Brad German, a spokesman for Freddie Mac. "This does not do anything new, the letter reminds and reinforces to servicers the importance of those requirements."
The Federal Housing Finance Agency, Freddie Mac's conservator, says the settlement agreements are serious violations.
"FHFA is aware of this issue," Corinne Russell, an agency spokeswoman, said in an email. "Freddie Mac's industry letter clarifies and reaffirms existing policy that lenders cannot make side agreements with mortgage insurers to resolve coverage and claims disputes."
Some say that the settlement agreements that Freddie Mac is objecting to in its industry letter ultimately may not have that much of an impact on mortgage putbacks. "They [Freddie] are still going to be able to put back the mortgages to the lenders," said David Reiss, a professor at Brooklyn Law School. "What they are really saying is that they are losing some free due diligence. But it doesn't seem like a fatal blow to Fannie and Freddie because they have been doing a pretty good job of identifying loans they could put back to lenders."
However, for the private mortgage insurers such settlement agreements can be a way to avoid costly court battles, and the cash payments help defray the expense of having to make a full payout on claims.
Private mortgage insurance can cover anywhere from 20% to 50% of the loan and souring loans have left insurers on the hook for billions of dollars in losses.
"They{the settlement agreements} are good for the insurers," Reiss said. "Instead of catastrophic losses, you are able to reduce it to a certain amount and that is a good thing. The uncertainty of the losses is potentially worse than the amount that you are paying."
Mortgage insurers certainly have been feeling the pinch. In its 10-K filings Genworth Financial said it had to increase reserves to account for higher levels of paid claims on mortgages gone bad — an approximately $85 million increase in reserves in the third quarter of 2010 and a $350 million increase in the fourth quarter of 2010.
However, the company also said that it reached an agreement with a servicer that reduced its risk in-force exposure. Genworth didn't respond by deadline.
Although the insurers might be able to find material misrepresentation in representations and warranties to use as a reason to deny coverage, such attempts often result in costly court battles with banks, said Glen Corso, managing director of the Community Mortgage Banking Project, a trade group. "By entering into an agreement with the seller-servicer, they are certainly avoiding the possibility that the seller-servicer would contest the recision in court."
The mortgage industry has been certainly facing major challenges in instances where they have attempted to deny coverage on mortgages that allegedly did not meet underwriting guidelines.
For example, Bank of America Corp.'s Countrywide unit has sued MGIC Investment Corp. alleging that the insurer has denied valid mortgage insurance claims.
In other instances, MGIC has gone the settlement route. According to the company's most recent annual report, in the second quarter of 2010, it entered into a settlement that affected fewer than 10% of its existing policies as well as delinquent inventory. Under the accord MGIC agreed to waive recision rights on matters related to mortgage origination and the unidentified customer agreed to contribute to the cost of the claims the insurer paid on the loans. MGIC did not identify the lender it settled with. MGIC spokeswoman Katie Monfre would not comment on the settlement.
MGIC also is exploring the possibility of further settlement agreements."We continue to discuss with other lenders their objections to material rescissions and/or the possibility of entering into a settlement agreement," MGIC said in its annual report. "In addition to the proceedings involving Countrywide, we are involved in legal proceedings with respect to rescissions that we do not consider to be collectively material in amount. Although it is reasonably possible that, when these discussions or proceedings are completed, there will be a conclusion or determination that we were not entitled to rescind, we are unable to make a reasonable estimate or range of estimates of the potential liability."
However, while MGIC appears to be splitting the cost of any claims on loans covered by the settlement agreement, if Freddie Mac owned any of those loans it would lose out on the ability to track them and to subsequently exercise their putback option.
"I am not sure that Freddie Mac would be aware of which loans they own that are referenced in the settlement," Corso said. "So if they are not aware, Freddie Mac would receive the claims but it would not know which loans were covered."
Corso, a former mortgage insurance executive, said that in court cases over rescissions, "the legal costs can be pretty intense for both sides." From the insurer's perspective, "they realize that with some mortgages they have a good case and other ones they might not have a good case. It might make more sense [to settle] than going to court and losing completely."
"Many of these situations are not black and white," Corso said. "It is not a question of 'I meant to buy 50 cars and this one is white, so you have to buy it back.' "
