Several consumer groups recently opposed the decision by the Federal Housing Finance Agency to stop efforts by Fannie Mae to reduce the cost of force-placed insurance for taxpayers and borrowers by more than $1 billion per year.
The groups include the Consumer Federation of America, the National Consumer Law Center, the Center for Economic Justice, the Consumer Watchdog, the Neighborhood Economic Development Advocacy Project and the Center for Responsible Lending.
Force-placed insurance, which is property insurance imposed by mortgage servicers on homeowners whose insurance policies are terminated or have lapsed, usually costs at least twice as much as traditional homeowners insurance, even though it provides much less coverage. The ratio of claims paid to premiums received by the insurer was 21 percent from 2004 to 2011, compared to a benefit ratio for standard homeowners insurance of 63 percent during the same time period. As a result of a struggling economy, FPI has risen substantially over the past few years from less than $1 billion in 2004 to $3.5 billion in 2011.
Fannie Mae announced a plan earlier this year to buy FPI directly from a number of insurance companies at an estimated 40 percent discount on prices currently charged by insurers, a move that could save taxpayers and borrowers more than $1 billion every year. Taxpayers would pay less for FPI than they do presently and borrowers would pay a price for FPI more closely related to the cost of providing the insurance and not the current inflated price driven up by insurers and mortgage servicers.
“While Fannie Mae clearly understands that the current structure of the force-placed insurance market is one based on reverse competition where prices rise to allow bigger kickbacks to lenders as the primary means for competing for the lucrative force-placed business, FHFA – which says more ‘competition’ will fix it – clearly does not,” Bob Hunter, the director of insurance at the Consumer Federation of America and an expert on FPI, said.
Fannie Mae has conducted studies of the FPI market for several years and issued a request for proposals last year that could cut back on FPI costs. Fannie Mae was preparing to implement the plan before the FHFA put a stop on the program, saying that a “measured approach” was needed.
“Fannie Mae’s original decision would have helped homeowners, taxpayers, and investors avoid unreasonable over-charges for homeowners insurance,” Andrew Pizor, an attorney at the National Consumer Law Center, said. “FHFA’s decision harms nearly everyone while preserving unfair practices in the mortgage servicing and insurance industries.”