The cost of captive reinsurance soon will no longer be reimbursed by the Federal National Mortgage Association nor the Federal Home Loan Mortgage Corp.
Their regulator and conservator, the Federal Housing Finance Agency, published a Federal Register notice in March seeking comment about its views on lender-placed insurance practices.
Concerns that the practices expose Fannie Mae and Freddie Mac to litigation risks, reputational risk and potential losses were cited in the notice.
FHFA Acting Director Edward DeMarco said he is also concerned about the cost of lender-placed insurance for Fannie, Freddie and borrowers.
A working group established by FHFA to address captive reinsurance consisted of federal and state regulatory agencies. The objective of the working group was to ensure that all parties with an interest and role in lender-placed insurance are engaged in the discussions.
Following a public comment period, FHFA issued a directive on the subject.
“The views of the working group were carefully considered along with the more than 30 replies FHFA received from consumer advocates, state regulators, lender-placed insurance carriers, servicers, managing general agents, individuals, and trade associations in response to the notice,” FHFA said in Tuesday’s announcement. “Today’s action reflects this input.”
The regulator notified the pair of secondary lenders that they must not allow mortgage servicers to be reimbursed for expenses associated with captive reinsurance arrangements.
Aligned guidance will be provided by Fannie and Freddie about prohibiting the practices. The guidance will include implementation schedules.