As promised last spring, the Federal Housing Finance Agency (FHFA) has moved to rein in the relationship between servicers and insurers providing forced placed insurance.  The regulator and conservator of Freddie Mac and Fannie Mae (the GSEs) said today it has directed the GSEs to prohibit servicers of their loans from being reimbursed by insurers for expenses associated with captive reinsurance arrangements. 

Forced or lender placed insurance (FPI) is insurance placed by a servicer, at the borrowers expense, on property when the borrower has failed to maintain his own homeowners or flood insurance.  It is typically much more expensive than insurance an owner could obtain on his own and highly lucrative for the insurance companies.  The insurance companies in return have paid servicers commissions for placing the policies or have established reinsurance arrangements in which the servicer or a subsidiary is paid for taking part of the insurance risk.  As Fannie Mae and Freddie Mac purchase or guarantee a large percentage of home mortgages, this action effectively will end those reimbursement practices for the industry.

FHFA's announcement follows one in March when FHFA published its views on lender-placed insurance policies in the Federal Register and opened a period of public comment.  Among other issues the notice cited concerns that current insurance agency and servicer practices could expose the GSEs to potential losses as well as litigation and reputation risks.

Before placing that notice FHFA, in a move strongly criticized by many consumer advocates, had instructed Fannie Mae to drop a program in which it would purchase FPI directly from a consortium of insurance companies at an estimated 40% discount from the prices being charged by QBE and Assurant which have written virtually all such coverage over the past few years.  FHFA said it needed to take a more "measured approach" and that any narrowly focused approach that would contain costs for the GSEs would do little to address the needs of a future market when the two no longer existed.

In addition to inviting public comment on the issue FHFA established a Regulatory Working Group consisting of both state and federal regulators to involve FPI stakeholders in the discussions.  FHFA said the views of the working group were considered along with more than 30 comments from consumer advocates, state regulators, servicers, and insurance carriers.

"FHFA remains concerned about the cost of lender-placed insurance for Fannie Mae, Freddie Mac, and consumers," said FHFA Acting Director Edward J. DeMarco. "One of our primary responsibilities as conservator of Fannie Mae and Freddie Mac is to preserve and conserve their assets on behalf of taxpayers. This directive is intended to reduce their costs as we consider additional measures."