Agency Moves to End Homeowner’s Insurance Policy Kickbacks
When mortgage owners allow a homeowner’s insurance policy to lapse, banks have the right to shop for a replacement policy. In many cases, they did that without consideration to fairness or cost.
Last month, US NewsÂ reported that an underhanded arrangement between homeownersâ€™ insurance companies and banks had inflated the cost of force-placed insurance coverage. Many lenders overpriced these insurance policies and received kickbacks from the insurers in exchange.
This month, federal regulators from theÂ Federal Housing Finance Agency moved to stop the practice with new guidelines.
Ten Times the Cost for a Homeowner’s Insurance Policy
According to the investigation, bank-purchased homeowner’s insurance purchased on behalf of the homeowner, known as force-placed insurance, costs two to 10 times more than a traditional policy does.Â Homeowners are obligated to pay the homeowner’s insurance premium, but the inflated cost of forced-placed coverage push many into foreclosure.
In the case of Government-Sponsored Enterprise loans (GSEs), like those through Fanny Mae and Freddie Mac, this puts the burden of excessive homeowner’s insurance policy rates on the American taxpayer.
Failed Opportunity to Save Taxpayers $300 Million
American BankerÂ reported on a little-publicized effort by Fannie Mae to stop the kickbacks. The plan would require lenders to choose from a group of approved insurance providers that would offer discounts of 30 to 40 percent. The savings would have amounted to at least $150 million a year in premiums, although the news site said it could have saved as much as $300 million.
Federal Housing Finance Agency Puts Stop to Kickbacks
On Nov. 4, the U.S. Federal Housing Finance Authority (FHFA) moved to put an end to the kickbacks. In a news release, the FHFA announced that it now restricts Fannie Mae and Freddie Mac from reimbursing â€œexpenses associated with captive reinsurance arrangements.â€
This is only the first step in correcting the problem, according to FHFA Acting Director Edward J. DeMarco.
â€œOne 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,â€ DeMarco said in a statement.