Regulator Wrongly Halted Plan to Discount 'Force-Placed' Insurance, Consumer Groups Decry

Regulator Wrongly Halted Plan to Discount 'Force-Placed' Insurance, Consumer Groups DecryA regulator’s decision to kill a plan that would have discounted premiums for replacement homeowners insurance on Fannie Mae loans has come under fire by several consumer groups.
The Federal Housing Finance Agency (FHFA), the conservator of the government-sponsored enterprises Fannie Mae and Freddie Mac, informed Fannie Mae staff and mortgage industry trade groups this week about the decision to halt the reduction of premiums, according to American Banker.
The regulator’s move blocks a plan by Fannie Mae that would have saved Fannie and homeowners as much as $300 million a year, according to published reports.
At the center of this controversial move is “force-placed insurance,” property insurance that mortgage servicers impose on homeowners whose insurance policies lapse or are cancelled.
Force-placed policies can cost twice as much as standard homeowners insurance, despite providing less coverage.
Fannie Mae, consumer advocates and some state insurance regulators have criticized the structure of the force-placed insurance market because force-placed insurers pay substantial kickbacks to mortgage servicers – “in the form of commissions, captive reinsurance schemes and below-cost services – often by overcharging homeowners who ultimately pay for the FPI (force-placed insurance) charges,” said a statement by the Consumer Federation of America.
Fannie’s plan would have provided homeowners with low-cost insurance from Fannie’s own vendors and prevented banks from collecting payments for steering business to “forced-placed” insurance carriers, American Banker said.
The media reports of the FHFA’s decision prompted several consumer groups to denounce the move.
“Fannie Mae’s original decision would have helped homeowners, taxpayers, and investors avoid unreasonable over-charges for homeowners insurance,” said National Consumer Law Center attorney Andrew Pizor.  “FHFA’s decision harms nearly everyone while preserving unfair practices in the mortgage servicing and insurance industries.”
The FHFA’s decision is a victory for a coalition of mortgage industry trade groups that have lobbied extensively against Fannie’s plan, American Banker reports.
Fannie’s plan had drawn criticism from mortgage and insurance industry trade groups over the past few months.
In the place of Fannie’s plan, the FHFA has asked Fannie to work with Freddie Mac and a group of mortgage industry trade associations to further study force-placed insurance costs,
Meg Burns, senior associate director of the FHFA’s office of housing and regulatory policy, told American Banker that the FHFA’s move was “a responsible and measured approach to put policy in place that is beneficial for both GSEs, consumers, and the industry at large.”

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