Big Banks Win, Taxpayers Lose (Just in Case You Didn't Get the Memo)

"As the overseer of mortgage giants Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) has a duty to safeguard taxpayer dollars. But the regulator may have done just the opposite earlier this month (2/12/13).

On February 11, the FHFA held a conference call to inform a group of mortgage trade associations that it had vetoed a Fannie Mae proposal to buy force-placed insurance directly from underwriters. The news was greeted warmly by those listening in, given that Fannie's plan had threatened to cut mortgage banks from their profitable positions as middlemen."

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"Fannie's plan would have lowered the cost of some homeowners' insurance significantly and saved the government-sponsored enterprise at least $145 million annually, sources familiar with Fannie's plan and program documents state.

The FHFA's decision left plan supporters and others at a loss for an explanation save one -- that the FHFA buckled under pressure from insurers and bankers, protecting controversial business practices that have drawn the ire of state insurance officials and consumer advocates alike.

"Incompetence or corruption. It's got to be one or the other," said Robert Hunter, a consumer advocate and former Texas insurance commissioner whose opinions dovetail with those of people closer to Fannie."

"State regulator, plaintiffs' attorneys and Fannie Mae have alleged over the past two years that the force-placed market is riddled with pay-to-play kickback schemes in which banks paid inflated prices for the insurance and then in return received lucrative commissions or sweetheart reinsurance deals from the underwriters. Such arrangements have been criticized for driving up the cost of force-placed coverage and sticking third parties with the bills.

Filings with the National Association of Insurance Commissioners show that a reinsurance affiliate Banc One, a subsidiary of JPMorgan Chase (JPM), earned more than $300 million reinsuring 75% of the premiums its borrowers paid last year, paying out only a fraction of that in claims. Such lucrative arrangements have created "reverse competition" by rewarding banks for buying the most expensive insurance possible, consumer advocates say.

"Over the 2010 to 2012 period, Assurant [one of the largest force-placed underwriters] passed almost $6 billion of premiums to captive reinsurance companies, but collected just $2 billion in claim payments," six consumer groups wrote in a letter to the FHFA." 

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