The federal agency that oversees Fannie Mae and Freddie Mac cracked down this week on a little-known form of consumer price gouging surrounding "force-placed" home insurance policies.
Following on a notice it published in the Federal Register last March, the Federal Housing Finance Agency (FHFA) announced Tuesday that servicers of Fannie Mae and Freddie Mac mortgages may no longer accept compensation from an insurer with whom they "force-place" coverage. Both government-sponsored home lenders were placed into federal conservatorship in September 2008 following the subprime mortgage scandal.
The FHFA says it's ending the commission practice over concerns that the bank servicers were using it to inflate the price of force-placed policies at the expense of Fannie Mae, Freddie Mac and ultimately taxpayers, while exposing the two mortgage giants to lawsuits and bad press.
Here's how force-placed insurance works: All mortgages require the borrower to purchase and maintain homeowners insurance coverage for the term of the loan. Should the policy lapse, most mortgages empower the lender to step in and force that insurance be "placed" on the property to protect their collateral.
The feds took a closer look at force-placed practices when it determined that the bank servicers were charging the insurance companies a commission for the business. This inflated the price of the policies, which commonly fell to Fannie Mae or Freddie Mac to pay when the home went into foreclosure, as occurred with alarming frequency during the recent recession.
The FHFA has left it to Fannie Mae and Freddie Mac to issue guidance and implementation schedules on the new force-placed rules to home sellers and insurers.
'Preserve and conserve' for taxpayers
"One of our primary responsibilities as conservator of Fannie Mae and Freddie Mac is to preserve and conserve their assets on behalf of taxpayers," says FHFA acting director Edward DeMarco. "This directive is intended to reduce their costs as we consider additional measures."
My take? This most resembles the old saw about locking the gate after the horse has departed. If we've learned nothing from the housing collapse, it's that "business as usual" can hide a multitude of sins in the lending world. I'm encouraged the feds have eliminated this one and hopeful that those aforementioned "additional measures" will prove equally fruitful.
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Jay MacDonald is a Bankrate contributing editor and co-author of "Future Millionaires' Guidebook," an e-book by Bankrate editors and reporters.