Fannie, Freddie Ordered to End Reimbursements for Force-Placed Insurance

WASHINGTON -- The Federal Housing Finance Agency told Fannie Mae and Freddie Mac to end reimbursements to mortgage servicers for expenses related to captive reinsurance arrangements.

The decision, which came late Monday, follows a proposal released in March by the agency to ban certain sales commissions and reinsurance arrangements that have allowed banks to recoup much of the money they paid in insurance premiums.

At the time, the proposal was seen by consumer advocates as something of a half-measure, because it doesn't prohibit every form of profit sharing between insurers and banks.

"FHFA remains concerned about the cost of lender-placed insurance for Fannie Mae, Freddie Mac, and consumers," said FHFA acting director Edward DeMarco, in a press release. "This directive is intended to reduce their costs as we consider additional measures."

In order to protect the interests of mortgage investors, banks buy force-placed insurance as a backup form of property insurance in the event their voluntary policies lapse. The product's reputation has been marred by apparent kickback schemes, in which banks paid inflated prices for the insurance but got much of the money back through unearned commissions and other arrangements.

The costs of inflated premiums have partially been passed along to mortgage investors like Fannie and Freddie, and ultimately to U.S. taxpayers, since the federal government essentially owns the two mortgage giants.

The agency said policy changes were reflective of input from over 30 responses ranging from consumer advocates, state regulators, services to lender-placed insurance carriers.

FHFA also created a working group of both federal and state regulatory agencies to ensure all parties had an opportunity to air their views.