House Democrats are demanding an explanation as to why the Federal Housing Finance Agency (FHFA) prohibited Fannie Mae from executing a plan to introduce new specialty lenders into the forced-place insurance market.

In a letter Wednesday to Edward DeMarco, acting director of the FHFA, a group of House Democrats, led by Rep. Maxine Waters, D-Calif., asked for a list of the interested parties—i.e., insurers, banks and trade groups—that asked the FHFA to stop Fannie Mae from providing incentives for additional insurers to enter the market, potentially reducing rates.

In her letter, Waters says, “As you know, the issue of forced-place insurance has long been a focus for us in Congress, like me, who have been concerned with the issue of broad-based mortgage-servicing reform.”

“Evidence suggests that forced-place insurance can cost up to 10 times more than voluntary homeowners' insurance, and that these excessive insurance costs increase the debt owed by borrowers and thereby impose unnecessary losses on guarantors such as the Government Sponsored Enterprises (GSEs) you are charged with conserving,” Waters continues.

Additionally, she says, mortgage-servicing experts point out that servicers regularly receive either commissions or reinsurance contracts from insurers offering forced-place coverage, giving both parties an incentive to expand the use and price of such coverage.

In her letter, Waters asks DeMarco for the specific reasons FHFA rejected Fannie Mae's proposal. She further requests the documents that formed the basis of the agency's decision, and a description of how “FHFA's decision is beneficial to taxpayers and borrowers.”

Waters' letter was prompted by the FHFA's Feb. 11 decision to stop Fannie Mae from reaching out to a consortium of new insurers it had asked to provide capacity, and lower rates, to the marketplace.

Zurich has been identified as the anchor insurer in the consortium of underwriters who had agreed to participate and compete with the two current major players: QBE and Assurant.

Securities analysts had downgraded Assurant's earnings potential for 2013 and 2014 by one-third to reflect Fannie Mae's proposal.

John Nadel, of Sterne Agee & Leach in New York, said in an investor's note last November that Zurich, while a limited player in the forced-place market in recent years, formerly owned ZC Sterling, a top-three player in the market, until it was sold to private equity in 2005 and subsequently to QBE in 2008.

Consumer groups had expressed outrage at the FHFA decision.

Representatives of the Consumer Federation of America were upset that mortgage-lending-trade representatives were on the conference call when the FHFA discussed the issue with Fannie Mae staff and announced the decision, while consumer groups were not asked to participate.