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February 11, 2013

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FHFA Kills Fannie Mae Force-Placed Insurance Plan

Americanbanker.com

The Federal Housing Finance Agency has killed a plan to slash premiums for replacement homeowners insurance on Fannie Mae loans, according to people informed of the agency's decision.

The FHFA, which is the conservator of the government-sponsored enterprise, announced its decision Monday on a conference call with Fannie Mae staff and mortgage industry trade groups.

The regulator's move will block a plan that was expected to save Fannie and homeowners as much as $300 million a year, according to people familiar with it. The plan would have supplied homeowners with low-cost housing insurance from Fannie's own vendors and prevented banks from collecting payments for steering business to "forced-placed" insurance carriers.

Force-placed insurance is hazard insurance purchased when struggling mortgage borrowers fail to maintain coverage on their own homes. 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 who buy it.

Fannie's plan represented the largest threat to the current structure of the industry, and 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 fellow GSE Freddie Mac and a group of mortgage industry trade associations to study force-placed insurance costs further. The original Fannie plan is not a possible outcome of those talks.

"That will not be part of the new direction," Meg Burns, senior associate director of the FHFA's office of housing and regulatory policy, said during an interview Monday afternoon. She called the FHFA's move "a responsible and measured approach to put policy in place that is beneficial for both GSEs, consumers, and the industry at large."

The FHFA's move is a coup for a coalition of mortgage industry trade groups that have lobbied extensively against Fannie's plan. Shortly after the markets opened on Tuesday morning, the stock price of Assurant (AIZ), the leading force-placed insurer, rose by 5%.

In a research note, analysts at Compass Point called the FHFA decision "a decisive positive for force-placed insurance providers and brokers."

Fannie's plan was scotched over concerns that the company did not have enough data on the current market, according to a person who participated in the conference call.

But major mortgage banks and the two major force-placed insurance carriers that dominate the current force-placed industry blocked the GSE's effort to obtain basic information about the insurance on its portfolio, sources familiar with Fannie's efforts say. Despite repeated requests, the company was unable to determine how many of its loans carry force-placed insurance, the precise cost of the policies for Fannie and the nature of the financial ties between mortgage servicers and insurers.

At first blush, the FHFA's move appears to end the single most significant regulatory threat to the force-placed insurance industry, which has been the subject of significant controversy over the last few years. American Banker has reported that the insurers provide sizable commissions to banks that give them business.

Force-placed insurance has also been the subject of several investigations by state regulators over the past few years.

"We would not disagree that historically there had been some very questionable practices between the parties," the FHFA's Burns said. But the agency has not set a deadline on when to act, and it says it believes competition in the market may be able to address some of the problems.

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