Freddie Mac is talking with force-placed insurers about ways to lower what it pays for their specialty product, according to the second largest insurance carrier in the market.
The talks, taking place under the auspices of the Federal Housing Finance Agency and still in the formative stage, could end up aligning Freddie's policies with reforms proposed by Fannie Mae.
Under standard mortgage terms, borrowers are contractually obligated to maintain hazard insurance. In the event that homeowners fail to maintain such coverage, mortgage servicers are entitled to buy force-placed coverage on their behalf and bill homeowners.
"Freddie Mac is working with a trade group to develop a lender-placed insurance cost solution to help reduce the cost to the investor program," said John Dickson, a vice president of QBE First Insurance Services, at a hearing on proposed QBE rates held by Florida's Office of Insurance Regulation last week. Freddie is "looking at opportunities similar to Fannie" but what the two will ultimately do remains unclear, he said.
Consumer advocates and insurance regulators in New York and California have condemned banks' practice of reinsuring or collecting commissions on the policies they buy, arguing that such arrangements amount to kickbacks and inflate the price of coverage. Testimony in federal class action cases and the preliminary findings of an investigation by the New York State Department of Financial Services have uncovered evidence that some major banks perform little or no work in exchange for the payments.
"The banks purchasing this insurance seem to have little incentive to keep prices down," Benjamin Lawsky, the head of New York's Department of Financial Services,
Mortgage investors
Fannie Mae surprised the industry in March by announcing that it would stop allowing servicers to collect commissions on loans it guarantees. Moreover, the GSE began exploring a plan to buy force-placed insurance directly from the two major specialty carriers, Assurant Specialty Property and QBE First. Fannie sought to break up the administration of the policies from the business of underwriting, according to a copy of the request for proposals
A second surprise came in late May, when Fannie
Freddie initially said it was not planning any similar announcements, even though both GSEs are in a conservatorship overseen by the FHFA. Industry participants and observers speculated at the time that the delay was aimed at allowing Freddie Mac time to align its policies with Fannie's — a view that appears to have been on target. Freddie Mac declined comment on possible discussions with insurers. The FHFA confirmed that it wanted to see coordination between the GSEs.
The FHFA is "working on a policy that will apply to both Fannie Mae and Freddie Mac on rules for force-placed insurance," an agency spokeswoman said.
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