Fannie Mae has lined up the Swiss giant Zurich Insurance Group in its bid to lower force-placed premiums, increase competition and cut banks out of commissions on insuring its portfolio, four people familiar with the plan say.
Zurich, with a market value of $36 billion and experience in force-placed underwriting, is the anchor member in a consortium of insurers that Fannie Mae has lined up to write policies on its portfolio at 30% to 40% discounts to existing premiums, these people said.
The discounts would slash the insurance premiums on Fannie's portfolio by hundreds of millions of dollars. However, the participation of Zurich and other insurers suggests that large and savvy players regard the less lucrative terms as still profitable.
"Everybody's saying the same thing, which is, ‘Sure, we could do that,' " says an employee for a multibillion-dollar insurer interested in Fannie's business. "There are numerous carriers that would be willing to participate."
The person asked to remain anonymous because insurers approached about the plan have been asked to abide by confidentiality agreements and because technical details of the insurer consortium still need to be worked out.
Zurich did not respond to requests for comment. Nor did the Federal Housing Finance Agency, which is Fannie's conservator and would need to sign off on its plan. Fannie declined to comment or confirm Zurich's role, andd the two major incumbent insurers in the force-placed market, Assurant and QBE, also declined to comment.
Force-placed insurance protects mortgage creditors when financially troubled homeowners allow their voluntarily purchased hazard insurance to lapse. Banks ultimately bill homeowners for the premiums, which cost far more than voluntarily purchased policies. In instances where homeowners do not or cannot pay, mortgage servicers pass along the unpaid costs of force-placed coverage to mortgage investors and guarantors such as Fannie Mae.
A 2010 review by American Banker found that the policies sometimes cost 10 times as much as the hazard insurance they replace — despite providing borrowers with fewer protections. Subsequent reporting found that insurers' losses on the policies have been minuscule over multi-year periods and banks have sometimes received commissions despite doing no work.
How much force-placed policies should cost has become a thorny question for insurance commissioners around the country. Consumer advocates allege that the price of the policies is inflated by kickbacks paid by insurers to win banks' business. Banks and insurers have rebutted those claims by asserting that the prices reflect the high risk of insuring delinquent homes and are set by the market.
Even before Fannie's plan to lower coverage costs came to light, insurance officials in California, Florida, and New York had decried high premiums or demanded reductions, citing the dearth of losses suffered by force-placed insurers. Zurich's willingness to accept steeply discounted premiums seems to buttress the state officials' efforts to lower rates.
The steep rate cuts are "doable," says Bob Hunter, a consumer advocate and former Texas insurance commissioner who has been a longtime critic of the force-placed business. "Because [Zurich] is from the industry and says it can do it, the other guys can't say it's impossible."
Three people familiar with Fannie's program confirmed that multiple specialty insurance carriers have said they would likely be willing to underwrite some or all of the business.
"There's no capacity shortage," said the insurance carrier employee who requested anonymity.
Robert Hartwig, president of the Insurance Information Institute, said that he couldn't comment on industry capacity without knowing the full scope of Fannie's plan. However, he did note that much of the catastrophe risk in the industry is already assumed by reinsurance companies.
"Reinsurance capacity at the right price would be there," Hartwig said.
Zurich's past participation in the force-placed market has significance beyond the question of whether the industry has the capacity to absorb Fannie's business. At the beginning of the last decade, Zurich was among the larger force-placed insurers in the U.S., writing policies for large banks through its ZC Sterling affiliate. It sold a majority stake in that company in 2005, but continued to underwrite business until QBE bought ZC Sterling in 2008.
Zurich maintained a limited presence in the industry afterward, but appears to be pursuing new business. A listing of its product offerings on ZProgramsMatch.com, a company marketing portal, includes a link to its "New!" force-placed offerings. Insurance brokerage Miniter Group, a Massachusetts-based firm that caters primarily to community banks and smaller mortgage servicers that need force-placed policies, says it has partnered with the company to offer the product.
"Zurich has the proven track record and capacity to meet the needs of our marketplace," says Jim Gilpin, Miniter's executive vice president for business development.
Fannie's plan could also incorporate Freddie Mac's portfolio, sources familiar with it say, though the smaller of the GSEs told American Banker earlier this month that it had chosen not to participate in Fannie's planning.