Regulation Looms in Force-Placed Insurance Boom
Borrower advocates say that the banks' use of unregulated carriers exposes homeowners and mortgage investors to higher costs and greater risk in the event of a catastrophe.
New York is demanding that force-placed insurers lower their rates after a series of hearings highlighted the high cost of the policies and potential conflicts of interest in how banks purchase insurance on delinquent borrowers' homes.
Specialty property insurer Assurant Inc. brought in $545 million in third quarter revenues from its force-placed insurance division. But the efforts of the company and its mortgage servicer clients' to adapt to growing regulatory pressures trumped the dollars and cents during a Thursday analyst call.
Assurant is attempting to create more "flexible" policies that address the concerns of banker clients and regulators about costs and services provided. Meanwhile, some banks are doing away with previous practice and are abandoning demands that they receive commissions or lucrative reinsurance contracts in exchange for buying forced-placed policies from insurers.
"Each client makes its own decisions," Robert Pollock, Assurant's president and chief executive, said during the call with analysts. "This is a servicer-specific issue."
Force-placed insurance is a type of hazard coverage purchased by banks to protect the properties of borrowers who allow their homeowners' insurance to lapse. Banks then lump into borrowers' monthly mortgage bill the cost of the policies.
The product itself is uncontroversial. However, regulators and other observers have been highly critical of the high profit margins earned on the insurance, the risk that already troubled borrowers will face further hardship and the nature of the financial relationships between the insurers and bank purchasers.
Banks often collect commissions or reinsurance payments on the policies the insurer writes. Such payments have been criticized as a form of pay-to-play, given that banks rarely perform significant work in exchange.
One major lender may have already shifted away from the controversial payments. Assurant did not identify Wells Fargo by name on the call, but the bank has said it has stopped collecting commissions on force-placed policies. Assurant won Wells' business from rival QBE Insurance in the second quarter, Wells spokeswoman Vickee Adams told American Banker earlier this month.
Wells' move was an "independent business decision," Adams says, though it was in keeping with Fannie Mae's guidance that banks should not be compensated on the policies.
Since the collapse of the housing market four years ago, the number of policies and the length they remain in place has skyrocketed, drawing increasing scrutiny. American Banker first wrote about the controversial financial relationships between banks and insurers two years ago, raising concerns that the commissions and lucrative reinsurance deals amounted to kickbacks.
New York state financial regulators demanded lower rates at a hearing in May. The Federal Housing Finance Agency, Fannie and Freddie's overseer, is also mulling a broad change in how the GSEs acquire replacement insurance on homes they guarantee. Such mortgages comprise the overwhelming majority of new loans.
Stock analysts following Assurant are bracing for more regulation following a steep California rate cut for Assurant on Monday.
"It's eerily quiet in New York and Florida," says John Nadel, an analyst at Stern Agee, alluding to the likelihood of additional rate cuts.
The New York Department of Financial Services is expected to release a report on force-placed insurance. Florida officials have made no public statements since the state's insurance commission rejected a QBE subsidiary's premiums as excessive two months ago.
Some servicers are getting a jump on regulators by altering their practices ahead of time. Pollock told analysts that a large client had altered or dropped its reinsurance deal with Assurant in the third quarter.
"I'm still in the camp that those are going away," says analyst Nadel of commissions paid to servicers.
Given the possibility that the force-placed market may change further, Assurant has been tinkering with a "next generation" policy that would allow for greater customization.
The insurer will take into account the location of a home in setting premiums. Deductibles and other product features may also be adjusted, it added.
"Our servicers then can have more choices in how they administer their own programs," Pollock says. "The impact on us will be somewhat dependent on client decisions."