The regulator of Fannie Mae and Freddie Mac is considering whether lawsuits should be filed against mortgage servicers that profited from excessive premiums on lender-paid insurance at the expense of the secondary lenders.
State insurance regulators found in 2012 and 2013 that lender-paid insurance premiums in their respective states were excessive.
The regulators found that the rates might have been driven up by servicers that share in the profits by steering business to certain providers.
Often, this was accomplished through commission structures and reinsurance deals,
Those findings were discussed in a report from the Federal Housing Finance Agency Office of Inspector General, FHFA’s Oversight of the Enterprises’ Lender-Placed Insurance Costs.
On mortgages that are foreclosed, the cost of lender-placed insurance is not always paid by the borrower.
As a result, Fannie Mae and Freddie Mac wound up paying $360 million in lender-placed insurance premiums during 2012.
In November 2013, FHFA directed Fannie and Freddie to prohibit such potentially collusive practices.
Both government-sponsored enterprises issued new guidelines prohibiting servicers from receiving lender-placed insurance commissions and from entering into reinsurance arrangements. Those guidelines took effect on June 1.
In Fannie’s Servicing Guide Announcement SVC-2013-27, the Washington, D.C.-based company said servicer affiliates cannot issue lender-placed insurance policies on its loans. This includes captive insurance or reinsurance arrangements with an affiliated entity.
But the OIG report indicated that FHFA has yet to thoroughly assess whether lawsuits should be filed to recover financial damages associated with past abuses.
“Agency officials cited competing priorities, such as finalizing other financial settlements, as the reason for not completing such an assessment,” the report stated.
But the OIG says that its own analysis has determined that the GSEs have suffered around $158 million in damages due to excessively priced lender-paid insurance premiums.
The OIG recommends that FHFA study the potential benefits of litigation against servicers to recover related losses.
FHFA reportedly agreed with the recommendation and plans to complete an assessment within 12 months.
