FHFA Ruling on Forced Placed Insurance Criticized by Consumer Groups

A consortium of consumer advocates is criticizing a recent decision by the Federal Housing Finance Agency (FHFA) regarding Fannie Mae's attempt to reform its forced-placed insurance program.  Forced Placed Insurance (FPI) is insurance placed on a property by a lender when the owner fails to keep hazard or flood insurance in place. 

The Consumer Federation of America, the National Consumer Law Center, the Center for Economic Justice, Consumer Watchdog, the Neighborhood Economic Development Advocacy Project and the Center for Responsible Lending issued a statement on Wednesday opposing the decision of FHFA to cancel a program implemented by Fannie Mae which the group said might save borrowers over $1 billion a year.

FPI policies typically cost at least twice as much as standard homeowners insurance while providing far less coverage.   The consumer groups said that FPI provides very low benefit ratios; the ratio of claims paid to premiums received by the FPI insurer was 21% over the period 2004 through 2011 compared to 63 percent for standard homeowners insurance over the same period. With the economy in recession and slow recovery, the amount of FPI sold has skyrocketed over the past several years from less than $1 billion in 2004 to $3.5 billion in 2011.

In its statement the consumer groups said, "Fannie Mae, consumer organizations 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 charges." 

Earlier this year, Fannie Mae announced a plan to purchase FPI directly from a consortium of insurance companies at an estimated 40% discount to prices currently charged by QBE and Assurant which together have written over 99 percent of FPI over the last several years.  Fannie Mae was moving to implement the plan when the Federal Housing Finance Agency ordered it to stop, citing a need to take a "measured approach."

Birny Birnbaum, executive director of the Center for Economic Justice and an expert on FPI. "The FHFA action maintains the status quo of massive overcharges to borrowers and taxpayers."