Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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Status quo trumps reality of lender-placed insurance

Regulators, insurers and servicers met in closed session recently to discuss lender-placed insurance and future recommendations — or lack there of — to a concept that seems to have hit many speed bumps along the way.

The issue has gained much traction with the Federal Housing Finance Agency announcing in March that it would crack down on certain practices related to force-placed insurance.

Tracey Carragher, CEO of Breckenridge Insurance Group, told HousingWire that the appropriate people met in session to discussed force placed insurance this week, but it was “a lot of back and forth bantering.”

“It’s really up to the FHFA, GSEs and CFPB to push forward with changes, which will the allow the industry to change,” she said.

The regulator essentially created new restrictions on the insurer’s relationship with banks and mortgage servicers. 

A few months later, the FHFA sat down with experts in the mortgage industry to discuss possible solutions to a number of issues affecting the lender-placed insurance market.

The proposed action would bar the government-sponsored enterprises from paying commissions to the banks servicing troubled mortgages that Fannie Mae and Freddie Mac guarantee. 

However, Carragher said that while critical attention was paid to the improper payments between insurers and servicers the market suffers from various systematic limitations. 

“You can’t regulate your way out of everything,” she said. “Smart people find their way around corners pretty easily.”

At the top of list of problems includes a lack of competition, overly inflated premiums and poor availability of information. 

Investigations have identified situations of ‘reversed competition’ in the lender-placed insurance market leading to higher premiums of which, 78% of the cost is being shouldered by the GSEs, Carragher explained.

As a result, these issues cost the GSEs, taxpayers and homeowners more than $150 million a year.

FHFA is rewriting the force-placed insurance rules at a time when many courts are taking on various class-action lawsuits on behalf of distressed borrowers faced with dealing with the cost of forced-placed coverage.

Thus, the goal Carregher and her fellow staff at Breckenridge have set is supporting the GSEs to open the lender-placed insurance market to competition, which will limit the necessity of legislative procedures while offering immediate savings to homeowners.

With such a simple solution proposed, what seems to be the backlog in directing an immediate resolution to forced-place insurance? 

The game has become one of investing in the status quo of the mortgage market versus the fundamentals of a sound mortgage finance system with limited action required from the FHFA. 

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