The Federal Housing Finance Agency's proposal to end inappropriate commissions and reinsurance arrangements does not go far enough to reduce the cost of force-placed insurance, a Georgia-based insurance broker says.
In a comment letter to the FHFA released this week, officials of OSC, a unit of Breckenridge Insurance Group, Kenesaw, Ga., says the changes proposed by the FHFA in March, "will not produce the market pressures necessary to increase the flow of information within the market, lower barriers to entry and put downward pressure on premiums."
The proposed FHFA action would bar the so-called "government-sponsored enterprises" from paying commissions to the banks who service troubled mortgages that the GSEs guarantee.
But Tracey Carragher, CEO of Breckenridge Insurance Group, says in the comment letter that while "significant attention has been paid to the improper commission payments between insurers and servicers and certain reinsurance practices, the [force-placed insurance] market suffers from a number of serious systemic limitations."
Chief among these problems, he says, are a lack of competition, overly inflated premiums and poor availability of information, inhibiting tracking of data such as premiums, claims, refunds, deductibles and other variables used to monitor rates and set policy.
"Independent investigations have identified situations of 'reverse competition' in the [force-placed] market, which have led directly to higher premiums, the cost of which is largely shouldered by the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac," Breckenridge/OSC says in the letter. "Taken together, these issues cost the GSEs, taxpayers and homeowners more than $150 million annually."
Last year, Breckenridge/OSC joined with Zurich and others in a proposal aimed at enlarging the force-placed insuance underwriting fraternity so that Fannie and Freddie could reduce the cost of providing homeowners insurance to trouble mortgages they insure.
Currently, Assurant and QBE control the market.
Under the proposal, Breckenridge/OSC would be the managing agent, and then spread the risk through multiple carries, of which Zurich would be the largest.
Breckenridge/OSC's bid was rejected by FHFA. However, under intense pressure from members of Congress and consumer groups, FHFA was then forced to come up with an alternative approach to reduce the high cost of force-placed insurance, leading to the March proposal.
Force-Placed Lawsuits
FHFA is rewriting the force-placed rules at the same time courts nationwide, particularly in Florida, are tackling a number of class-action lawsuits filed on behalf of troubled homeowners faced with absorbing the difference between regular homeowners insurance and the cost of force-placed coverage.
In one lawsuit filed in Miami, a couple with a home in Golden Beach placed in a force-placed program by J.P. Morgan Chase Bank allege they were charged $54,142.56, compared to the $5,007 per-year premium charged by its former insurer, state-run Citizens Property Insurance Corp.
The cost was added to the principal of the family's mortgage.
Judge Federico Moreno, chief of the federal district court in Miami, is presiding over five class action lawsuits filed against J.P. Morgan Chase, Bank of America, Citibank, HSBC Bank USA and Wells Fargo. The lawsuits against Wells Fargo, HSBC, Citi, Chase and Assurant. He told lawyers last week that he was going to set all five cases for trial this year.
Adam Moskowitz, a partner at Kozyak Tropin & Throckmorton and co-counsel in the cases, says Florida has more force-placed insurance in place than any other state.
In another case, Wells Fargo and QBE agreed May 13 to settle a lawsuit in federal court in Miami dealing with force-placed insurance policies in Florida involving 33,000 borrowers. The companies will pay $19.3 million to compensate the borrowers.
The judge Tuesday preliminarily approved the settlement and set the case for final action Sept. 11.
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