Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (collectively, the Enterprises) require their borrowers to maintain hazard insurance on their homes. The insurance safeguards the value of the homes in the event of a fire or other covered incident, thereby preserving the Enterprises’ interests in them. The Enterprises’ mortgage servicers are responsible for ensuring that borrowers maintain hazard insurance on their properties. To do so, the servicers outsource this task to specialty insurance companies that track the status of borrowers’ insurance policies. When a provider identifies a lapse in hazard insurance, it initiates new coverage known as lender-placed insurance (LPI).
The Enterprise that Holds the Mortgage Is Liable for a Borrower’s Unpaid LPI Premiums after Foreclosure
Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) contract with servicers to ensure the homes that secure their mortgages are covered continuously by hazard insurance.5 Generally, servicers outsource this task to specialty insurance companies—LPI providers. As depicted in Figure 1 below, the LPI providers:
- Track hazard insurance coverage on the mortgaged properties; and
- Place hazard insurance on properties whose coverage has become deficient.
Two LPI providers and their subsidiaries do most of this work for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s servicers. The companies are Assurant, Inc. (Assurant) and QBE Holdings, Inc. (QBE).6 Collectively, Assurant and QBE subsidiaries write more than 90% of the nation’s LPI coverage, according to industry observers.
Under this arrangement, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’ servicers are responsible for negotiating and purchasing insurance from LPI providers;7 however, the borrowers and Enterprises are ultimately liable for the premiums.8 For example, when an LPI provider determines that a mortgaged home is not covered adequately by hazard insurance, it places coverage on it and bills the Enterprise’s servicer.9 The servicer then advances the premium to the LPI provider and charges the borrower for that expense.10 In the event of foreclosure, the Enterprise that holds the mortgage reimburses the servicer for the borrower’s unpaid LPI premiums. According to the Enterprises, they reimbursed servicers approximately $360 million for LPI premiums in 2012 and $327 million in 2013.11
Several State Insurance Regulators Have Found LPI Premium Rates to Be Excessive
Over the last two years, insurance regulators in three large states—New York, Florida, and California12—determined that Assurant, QBE, and their subsidiaries charged excessive rates for LPI.13 The state regulators also found that, in certain cases, LPI rates may have been driven up, in part, by profit-sharing arrangements entered into by the servicers and the LPI providers. The regulators have employed a variety of enforcement techniques to reduce LPI rates within their respective jurisdictions and prevent further abuses. The details of the state insurance regulators’ enforcement actions are set forth below.
New York. In spring 2013, the New York Department of Financial Services (NYDFS) found that subsidiaries of Assurant and QBE violated New York’s insurance laws by charging excessive LPI rates.14 NYDFS came to this conclusion by examining the subsidiaries’ loss ratios. It found that the LPI providers’ actual loss ratios were particularly low in comparison with the expected loss ratios they filed with the state.15 The regulator concluded that the disparity between LPI providers’ actual and expected loss ratios indicated that the LPI providers were retaining a relatively large amount of insurance premiums (see Figure 3 below).
Notably, the Assurant subsidiary’s loss ratio was below 25% in six of the seven years reported. The LPI provider’s expected loss ratio on file during that time was approximately 58%. NYDFS observed that the LPI provider’s loss ratio elevated to just 42.8% in 2012—a year in which the state was hit by a severe storm. Similarly, the QBE subsidiary’s loss ratio was below 30% in six of the seven years reported while its expected loss ratio was 55%.
See full document here FHFA Fannie Mae via fhfaoig.gov
H/T Alan Zibel of MoneyBeat