Waters Presses FHFA on Force-Placed Veto

Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, is seeking to know why the Federal Housing Finance Agency blocked a Fannie Mae proposal related to force-placed insurance that its supporters say would have saved the company — and the government — millions of dollars.

In a letter sent Thursday to FHFA Acting Director Edward DeMarco, Waters requested "an explanation of the specific reasons why FHFA rejected Fannie Mae's proposal, including the documents that form the basis of the agency's view."

The California Democrat also asked the government-sponsored enterprises' conservator to provide a list of outside "stakeholders" it consulted before making its decision.

Force-placed insurance is a variety of backup homeowners insurance intended to protects mortgage investors when homeowners allow their voluntarily-purchased hazard insurance to lapse. It has become increasingly controversial in recent years as state regulators and consumer advocates have uncovered a pattern of alleged kickbacks from insurers to the banks that are in charge of buying it.

After the housing bubble collapsed, the cost of force-placed insurance became a significant burden on Fannie Mae, which was stuck paying for the insurance when homeowners didn't. To combat its rising hazard insurance bills — $631 million last year alone — Fannie devised a plan to buy the insurance directly at a roughly 30% discount, saving taxpayers $145 million a year.

As American Banker reported earlier this week, people familiar with the Fannie plan believed implementing it was an obvious business decision that would benefit both taxpayers and struggling homeowners. But mortgage industry trade groups lobbied against the plan, and FHFA told them it would veto Fannie's proposal during a private conference call last week.

Consumer advocates such as the Consumer Federation of America's Bob Hunter have denounced the FHFA's decision as the result of "incompetence or corruption." In her letter to DeMarco, however, Waters simply cited "concern" about the decision. 

"The issue of force-placed insurance has long been a focus for those of us in Congress, like me, who have been concerned with the issue of broad-based mortgage servicing reform," Waters wrote, citing evidence that banks' current force-placed practices impose "unnecessary losses on guarantors such as the Government Sponsored Enterprises (GSEs) you are charged with conserving."

The FHFA has not offered a detailed explanation of why it chose to block Fannie's plan, though it said it wants Fannie to study the force-placed market with its sister GSE, Freddie Mac.

"There is widespread agreement that issues associated with force placed insurance need to be resolved for the benefit of investors and borrowers alike," a spokeswoman for the FHFA wrote to American Banker earlier this month. "FHFA has paused Fannie Mae's efforts in order to seek a broader, more inclusive approach that could have broader benefit in the marketplace."

In addition to a fuller explanation of the FHFA's decision, Waters is also asking for details of how the agency intends to approach the business in the future. Her letter asks for "an outline of FHFA s plan, if any, on how to proceed with force-placed insurance reform as the GSEs move forward and clear guidance as to how Fannie Mae or Freddie Mac may propose plans for FHFA's review."

"There is widespread agreement that issues associated with force placed insurance need to be resolved for the benefit of investors and borrowers alike," a spokeswoman for the FHFA wrote to American Banker earlier this month. "While Fannie Mae developed a particular approach, after a thorough review FHFA determined that it was not adequately documented or designed to broadly address issues associated with force placed insurance. FHFA has paused Fannie Mae's efforts in order to seek a broader, more inclusive approach that could have broader benefit in the marketplace."