'Forced' Home Insurance Policies Face New Scrutiny - Wall Street Journal (blog)

By Alan Zibel

Home buyers take out homeowners' insurance policies to protect the value of their home and personal property in the event of a burglary or a natural disaster. The insurance is typically required to get a home loan, and if borrowers fall into default, banks have the right to make sure the property still has such coverage.

However, officials at the state and federal level have been concerned that insurers have been charging too much for something known as "force-placed insurance," which takes the place of a lapsed policy.

This week, a new U.S. consumer watchdog and mortgage giant Fannie Mae have been promising a crackdown on those homeowners insurance policies.

In a speech Tuesday, the director of the new federal Consumer Financial Protection Bureau, Richard Cordray, said his agency will issue rules "to prevent (mortgage) servicers from charging for this product unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance."

In addition, Fannie Mae, the federally controlled mortgage finance giant, also said this week that it would take steps to more tightly control force-placed insurance. Fannie Mae said it would solicit proposals from insurance companies seeking to compete for its force-placed business. If it ultimately decides to do so, it would be a departure from current practice, in which lenders manage their own business relationship with force-placed insurance providers.

Fannie Mae said in an e-mail sent to the mortgage industry that such policies are "significantly more" expensive than coverage bought by homeowners and "often include commissions and other administrative costs." An expensive policy, Fannie Mae noted, can make it harder for homeowners to avoid foreclosure by becoming current on their mortgage balances. And when homeowners do lose their homes, government-backed Fannie Mae winds up paying the cost of the policies.

"This is the first step to lower the cost of lender placed insurance policies for Fannie Mae and taxpayers, and to help reduce one of the barriers for struggling borrowers to become current on their loans," said Andrew Wilson, a Fannie Mae spokesman. We will have further guidance for mortgage servicers in the near future."

In addition, New York's top financial regulator, Benjamin Lawsky, has been probing the issue.

The biggest sellers of the insurance are Assurant Inc. and Balboa Insurance Group, which was formerly owned by Countrywide Financial. Bank of America, which purchased Countrywide, sold Balboa to Australia's QBE Insurance Group Ltd. last year.

An Assurant spokeswoman said the company would participate in Fannie Mae's process. "We have spoken with Fannie many times about possible alternatives that are practical to implement for servicers, Fannie and homeowners," the spokeswoman said. A representative of QBE couldn't be reached for comment.