A consortium of consumer advocates is criticizing a recent decision by the
Federal Housing Finance Agency (FHFA) regarding Fannie Mae's attempt to reform
its forced-placed insurance program.
Forced Placed Insurance (FPI) is insurance placed on a property by a lender
when the owner fails to keep hazard or flood insurance in place.
The Consumer Federation of America, the National Consumer Law Center, the
Center for Economic Justice, Consumer Watchdog, the Neighborhood Economic
Development Advocacy Project and the Center for Responsible Lending issued a
statement on Wednesday opposing the decision of FHFA to cancel a program implemented
by Fannie Mae which the group said might save borrowers over $1 billion a year.
FPI policies typically cost at least twice as much as standard homeowners
insurance while providing far less coverage. The consumer groups said that FPI provides very
low benefit ratios; the ratio of claims paid to premiums received by the FPI
insurer was 21% over the period 2004 through 2011 compared to 63 percent for standard
homeowners insurance over the same period. With the economy in recession and
slow recovery, the amount of FPI sold has skyrocketed over the past several
years from less than $1 billion in 2004 to $3.5 billion in 2011.
In its statement the consumer groups said, "Fannie Mae, consumer
organizations and some state insurance regulators have criticized the structure
of the force-placed insurance market because force-placed insurers pay
substantial kickbacks to mortgage servicers- in the form of commissions,
captive reinsurance schemes and below-cost services -often by overcharging homeowners
who ultimately pay for the FPI charges."
Earlier this year, Fannie Mae announced a plan to purchase FPI directly from
a consortium of insurance companies at an estimated 40% discount to prices
currently charged by QBE and Assurant which together have written over 99
percent of FPI over the last several years.
Fannie Mae was moving to implement the plan when the Federal Housing
Finance Agency ordered it to stop, citing a need to take a "measured approach."
Birny Birnbaum, executive director of the Center for Economic Justice and an
expert on FPI. "The FHFA action maintains the status quo of massive overcharges
to borrowers and taxpayers."