U.S. Cracks Down on 'Forced' Insurance

by 26 Mar 2013

(WSJ) A U.S. housing regulator is cracking down on a little-known practice that has hit millions of struggling borrowers with high-price homeowners' insurance policies arranged by banks that benefit from the costly coverage.

The Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae and Freddie Mac, plans to file a notice Tuesday to ban lucrative fees and commissions paid by insurers to banks on so-called force-placed insurance.

Such "forced" policies are imposed on homeowners whose standard property coverage lapses, typically because the borrower stops making payments. Critics say the fee system has given banks a financial incentive to arrange more expensive homeowners' policies than necessary.

Banning the fees and commissions could help lower the price of the insurance policies. The housing agency's move would apply nationwide to all mortgages guaranteed or owned by Fannie and Freddie—about half of the housing market.

Bloomberg News Edward DeMarco, acting director of the Federal Housing Finance Agency.

Forced policies have boomed in the wake of the housing bust, as many homeowners struggled to keep up with mortgage payments. Some borrowers may try to save money by dropping the original standard coverage, only to be hit by policies with premiums that are typically at least twice as expensive as voluntary insurance, and sometimes cost as much as 10 times more. Nearly six million such policies have been written since 2009, insurance industry data indicate. Consumers are free at any point to replace a force-placed policy with one of their own choosing.

Property insurance generally is required to secure a mortgage and protects not only the homeowner's investment but also the lender's.

Regulators say some consumers don't read warning letters that they will be subject to potentially more-expensive coverage if they don't restore their original coverage or line up some other homeowners' policy.

They only realize months into the new arrangement that the amount they are being billed is much higher than they previously paid for coverage.


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