Compass Point: Walter Investment most at risk of FHFA forced-placed insurance suit

Nonbank servicers could be targeted

Citing “considerable financial harm” inflicted upon Fannie Mae and Freddie Mac, the Federal Housing Finance Agency’s Office of the Inspector General is recommending that the FHFA sue its servicers and lender-placed insurance providers because the companies cost the GSEs hundreds of millions of dollars by charging excessively high rates for LPI.

In the OIG report, it estimates that the high LPI rates cost the GSEs $158 million in 2012.

The FHFA’s general counsel said, in response to the OIG’s investigation, that it had not considered litigation yet but will take the issue under advisement and consider litigation in the future.

If the FHFA does decide to sue, analysts from Compass Point Research and Trading suggest that nonbank servicers could be prime targets.

If the FHFA were to attempt to recover ‘damages’ related to excessive fees on lender-placed insurance, we do not expect any potential litigation to be a significant hit to the large banks involved in servicing large delinquent portfolios,” Compass Point said. “But it could have a material impact on special servicers that have a less diversified revenue base and service highly delinquent GSE mortgage portfolios.”

The nonbank servicers at the forefront of the potential litigation are Walter Investment Management (WAC) and Nationstar (NSM). According to Compass Point, Ocwen Financial Corporation (OCN) does not charge lender-placed insurance commissions on GSE servicing and therefore would not be a target for litigation.

Compass Point suggests that Walter would be the most “exposed” to the potential litigation. “WAC recorded $85 million of revenue and $46 million of pretax income from their insurance segment during 2013, of which 65% of the policies written were for lender-placed insurance,” Compass Point’s analysts noted.

“Lender-placed insurance is significantly more expensive than voluntary homeowners' insurance and we estimate the total insurance commissions from lender-placed policies could be 70%+ of total insurance revenue for WAC.”

Compass Point said that Nationstar has less exposure to legal action because its LPI commissions are a much smaller percentage of its overall revenue stream.

“Although it remains to be seen whether the FHFA will take legal action, the potential litigation related to lender-placed policies could be an incremental negative for Walter and a slight negative for Nationstar,” Compass Point’s analysts said.

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