Robert M. Siegel
Robert M. Siegel. (A.M. Holt)

Call it fear of litigation or a public relations stunt.

Either way, Fannie Mae and Freddie Mac aim to end the party for banks and insurances companies accused of gouging tens of thousands of homeowners, mostly in Florida, on expensive forced-placed insurance policies.

The Federal Housing Finance Agency directed Fannie Mae and Freddie Mac last month to prohibit mortgage servicers from being reimbursed for expenses associated with captive reinsurance arrangements.

The move is a victory in an ongoing consumer fight to take the profit incentive—commissions paid by insurers to lenders—out of policies forced on owners who don’t show proof of homeowner insurance.

When policies lapse, lienholders can go out and buy insurance. However, lenders and insurance companies were replacing policies on behalf of the borrowers at prices up to 10 times more than in the open market.

Florida is ground zero for forced-place insurance, accounting for more than 30 percent of all of policies sold nationwide. The state also leads the nation in class-action lawsuits against banks to end forced-place insurance and follows only California in mortgages backed by the government-sponsored enterprises.

“The problem with force-place insurance on residences in Florida, as you know, is very widespread, and Fannie Mae and Freddie Mac are big investors,” said Robert M. Siegel, a bankruptcy and tax partner at Bilzin Sumberg Baena Price & Axelrod in Miami.

Coral Gables attorney Adam Moskowitz, a partner at Kozyak Tropin & Throckmorton with six national forced-placed class actions pending in Miami federal court, said Fannie and Freddie were being hit with a lot of these fees on the policies in foreclosures.

“They were paying a lot of these excess fees. If you get foreclosed upon and they guaranteed your mortgage, they have been paying these excess fees, and they have had enough,” he said.

Mounting Concerns

Siegel, who writes the Mortgage Crisis Watch blog with Bilzin associate Anthony Narula, said the rule change came because of mounting concerns that the insurance practice exposed Fannie Mae and Freddie Mac to potential litigation. Another concern was the forced-placed insurance would further tarnish the secondary mortgage buyers’ reputation with consumers—a reputation left in tatters from the 2008 collapse of the housing market.

The Nov. 5 announcement followed a flurry of lawsuits filed against JPMorgan Chase & Co., Citigroup Inc., HSBC Finance Corp. and Bank of America Corp., which started bearing fruit in 2013.

A lawsuit brought by 24,000 Floridians against Wells Fargo & Co. and insurance company QBE Insurance Group Ltd. resulted in a $19.3 million settlement in May. A case against JPMorgan Chase and insurance partner Assurant Inc. settled in September for $291 million.

“For Freddie and Fannie to impose something in the wake of this Chase settlement, it suggests reforms are continuing,” Siegel said.

Moskowitz, who takes credit for spawning the idea for the class-action litigation, said it might not be coincidental that QBE last week predicted a $250 million loss for 2013 because of its North American market. “Forced-place insurance plays a huge percentage of QBE’s profits,” he said.

FHFA’s directive was short on details, but it’s fairly clear that servicers can no longer collect commissions from insurance carriers, according to Siegel.

Additionally, banks will not be able to use their own affiliates to place insurance coverage.

Some sources that have been critical of the practice are skeptical that the FHFA’s announcement will do anything to bring down the price of forced-place policies.

Industry experts note the new restrictions have left a gaping hole by still allowing insurers to provide value to banks that refer them business, such as providing services for free or at a reduced cost, Siegel said.

Edward DeMarco, the acting head of the FHFA, qualified the restrictions last month as merely being an interim step.

Siegel said banks appear to have been expecting the FHFA restrictions. Chase, he pointed out, recently announced it discontinued commissions and ended its agreement with Assurant.

Moskowitz added, “We are very appreciative and thankful to those companies that have already changed these practices across the country.”

State Restrictions

New York state in September placed its own restrictions on the forced-placed insurance industry.

“It will be interesting to see what new steps the FHFA and other states will take to attempt to close remaining loopholes and silence critics in the industry,” Siegel wrote on Bilzin Sumberg’s blog, Mortgage Crisis Watch along with his colleague Anthony Narula.

Thomas Martin, president of the consumer advocacy organization America’s Watchdog in Washington, said he doesn’t believe Fannie Mae or Freddie Mac have the enforcement capabilities to carry out the new rule.

“We don’t think anything changes,” Martin said.

He said many banks have in-house captive insurance companies, and the FHFA rule could actually benefit them by cutting out QBE and Assurant, which dominated the forced-place insurance industry.

A new problem also has emerged in recent months involving insurance paperwork lags after the sale of mortgages, he said.

New servicers have bought forced-place policies while homeowners pay their original policies.

“This is another way for banks to do some of the same crap they did in ’04, ’05 and ’06 that got them in so much trouble,” Martin said. “If the loan servicers want to pillage their clients, they can do so.”

Moskowitz, though, said taking away the profit incentive under the FHFA rule change coupled with the litigation have taken the wind out of the sails of forced-placed insurance.

“It’s certainly not as profitable as it was before,” he said. “It does not appear as profitable as a business as it was prior to our team filing all of these lawsuits.”