Earlier this month, Congresswoman Maxine Waters, a ranking member of the House Financial Services Committee sent a letter to Edward DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA). She demanded to know why the agency quashed Fannie Mae's force-placed insurance initiative that would ultimately save the government and homeowners millions.
As Andrew Carnegie said, "upon the sacredness of property civilization itself depends." But the recent ruling of the FHFA to prevent Fannie Mae's plan to substantially decrease premiums for homeowners' insurance seems antithetical to Carnegie's mantra and to those who own homes. This is especially true when homeowners are most in need.
In the United States, mortgage servicers impose what is called forced-place property insurance on homeowners when their insurance policies lapse or are cancelled for any reason. This form of insurance (also called lender-placed insurance) is key in protecting lenders' assets when they become uninsured. The amount of the premium the servicer pays is then added to the amount of the loan on the property so the homeowner eventually pays for this insurance.
But these policies typically cost at least twice as much as standard homeowners insurance, despite providing far less coverage. So to alleviate these high premiums, Fannie Mae created an initiative to directly purchase forced-place insurance from a group of insurance companies and lower the cost of the insurance by about 40%.
The plan sounded promising until the FHFA recently decided to quash Fannie Mae's initiative to reduce premiums for replacement homeowners insurance. The FHFA's move substantially troubled Congresswoman Waters who was inspired to write to DeMarco, demanding to know why the FHFA acted as it did. DeMarco has still not responded.
Why is the issue so pressing? The current lender-placed insurance is dominated by two insurance companies, Assurant and QBE, who write more than 90% of total lender-placed insurance. Under the current structure, the loan servicers (primarily banks and loan servicing companies) receive commissions from Assurant and QBE for more or less doing nothing. Since the lender makes money on every policy placed with their lender-placed insurance carrier, there is no incentive for the lender to seek out or help the borrower to keep standard insurance on their property. Many of the larger mortgage companies also have lucrative reinsurance agreements in place that further reduce their desire to lower rates.
Essentially, the FHFA's ruling will impact many. Anyone who pays for lender-placed insurance is affected, but primarily those with low incomes will suffer the brunt of the expense. Additionally, tax payers are impacted because Fannie Mae (and also Freddie Mac) are left to overpay for this coverage for every homeowner who does not pay.
It is said that Fannie Mae's proposed plan would have reduced the cost of force-placed insurance for borrowers and taxpayers by over $1 billion a year. In fact, Fannie Mae conducted a very thorough process to find ways to lower the cost of lender-placed insurance. OSC, (a subsidiary of Breckenridge Insurance Group), developed a consortium approach for Fannie Mae utilizing a number of insurance companies while lowering rates 30% to 40% across the country. The plan would have given Fannie Mae the ability to continue to monitor and insure competitive rates and claims procedures in the future. This program also creates transparency in the rating process and removes commissions to the mortgage servicers.
The FHFA's decision preserves unfair practices in the mortgage servicing and insurance industries. It means the new approach and lower rates will not be implemented and therefore the status quo will continue.
The best way to inspire the Federal Housing Finance Agency to reconsider is to write your congressmen or representative and ask him or her to put an inquiry into the FHFA as Congresswoman Waters has already done.