FHFA axes forced-placed insurance commissions

FHFA axes forced-placed insurance commissions | Insurance Business America

FHFA axes forced-placed insurance commissions

The Federal Housing Finance Agency has fulfilled a promise it made last March, today instructing Fannie Mae and Freddie Mac to prohibit mortgage servicers from being reimbursed for expenses related to forced-placed insurance.

Forced-placed insurance is placed on a property by the lender – at the borrower’s expense – when the borrower doesn’t maintain flood or homeowners insurance. Usually much more expensive than insurance homeowners could acquire themselves, forced-placed insurance is a goldmine for insurers, who up to now have shared the wealth with lenders by paying commissions for placing the policies.

Today’s directive from FHFA, however, effectively puts the kibosh on that, citing concerns that the practice could expose Fannie and Freddie to potential losses, litigation and “reputation risks.”

“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.”

Lenders such as Wells Fargo, however, have consistently defended the practice of forced-place insurance. In a California court Friday, the South Dakota-based bank asked a federal judge to toss out class action claims saying it forced the costly policies onto homeowners, on the basis that Wells Fargo “repeatedly warned” homeowners the insurance policies would be more expensive than others.