Sources: Zurich Back in Force-Placed Under Fannie Plan

NOV 29, 2012 9:37am ET

Fannie Mae has lined up Swiss giant Zurich Insurance Group in its bid to lower force-placed premiums, increase competition and cut banks out of commissions on insuring its portfolio, four people familiar with the plan say.

Zurich, with a market value of $36 billion and experience in force-placed underwriting, is the anchor member in a consortium of insurers that Fannie Mae has lined up to write policies on its portfolio at 30% to 40% discounts to existing premiums, these people said.

The discounts would slash the insurance premiums on Fannie's portfolio by hundreds of millions of dollars. However, the participation of Zurich and other insurers suggests that large and savvy players regard the less lucrative terms as still profitable.

"Everybody's saying the same thing, which is ‘Sure, we could do that,'" says an employee for a multi-billion dollar insurer interested in Fannie's business. "There are numerous carriers that would be willing to participate."

The person asked to remain anonymous because insurers approached about the plan have been asked to abide by confidentiality agreements and because technical details of the insurer consortium still need to be worked out.

Zurich did not respond to requests for comment, nor did the Federal Housing Finance Agency, which is Fannie's conservator and would need to sign off on its plan. Fannie declined to comment or confirm Zurich's role, and the two major incumbent insurers in the force-placed market, Assurant and QBE, also declined comment.

Force-placed insurance protects mortgage creditors when financially troubled homeowners allow their voluntarily-purchased hazard insurance to lapse. Banks ultimately bill homeowners for the premiums, which cost far more than voluntarily purchased policies. In instances where homeowners do not or cannot pay, mortgage servicers pass along the unpaid costs of force-placed coverage to mortgage investors and guarantors such as Fannie Mae.

How much force-placed policies should cost has become a thorny question for insurance commissioners around the country.  Consumer advocates allege that the price of the policies is inflated by kickbacks paid by insurers to win banks' business. Banks and insurers have rebutted those claims by asserting that the prices reflect the high risk of insuring delinquent homes and are set by the market.