By Benjamin Goad - 03/26/13 02:25 PM EDT
The agency, which overseas government-backed lending giants Fannie Mae and Freddie Mac, is weighing new restrictions on commissions and fees related to lender or “force-placed” policies, according to a notice to be published in the Federal Register.
Force-placed insurance is imposed when a homeowner allows their policy to lapse. Lenders are required to notify them of the need to provide proof of insurance. If they do not, the lender may select policies with higher premiums and diminished coverage.
“Reportedly, premiums for lender-placed insurance are generally double those for voluntary insurance and, in certain instances, significantly higher,” according to FHFA.
Groups, including the National Association of Insurance Commissioners, have raised concerns that the practice amounts to “reverse competition,” whereby lenders select the policies that borrowers must pay for — potentially leading to excessive profit.
The financial crisis led to increased demand for lender-placed insurance, and much of the risk is borne by the American public, according to the FHFA. In cases where force-placed insurance is imposed on Fannie or Freddie-owned mortgages that are foreclosed upon, the lenders, which are supported by taxpayers, must absorb the costs.
The FHFA is seeking input about how new regulations prohibiting force-placed insurance would affect the housing market. Interested parties will have 60 days to comment once the notice is published.