Some lender-placed insurance reform efforts are moving ahead at the Federal Housing Finance Agency in conjunction with other regulators, and policy changes will get underway in 2013, according to the FHFA.
“We’ve established a very constructive working collaboration with state and federal regulators and confirm that policy changes will be forthcoming this year,” an FHFA spokesperson said in an e-mail sent to this publication, after being asked about a previous LPI reform effort that has been on hold at Fannie Mae for some time, something that has frustrated the company that won the request for proposal to fulfill it.
It was unclear at deadline whether the policy changes in the works would mean a revival of
Jose Perez de Corcho, EVP at Breckenridge Insurance Group subsidiary OSC, who has said his company won the RFP for the previous Fannie LPI reform effort, signed a contract and received direction to draw up the plan and lay some groundwork for it before it was put on hold, could not be reached for follow-up comment on the FHFA’s statement at deadline.
The OSC executive in an earlier interview before the release of the FHFA’s statement had said that plan “would have provided a substantial savings” for Fannie Mae in excess of $200 million.
“We did have a contract drawn up and executed on our part,” the OSC EVP said, adding that the company, which has been active in the market as an outsourcer working on behalf of insurers, received “direction to proceed” with the contract “as if executed.
“Our company did take on hiring of staff resources as necessary to implement it,” he said, noting that although Fannie did not countersign the contract, it received direction suggesting the contract only needed a “rubber stamp.”
Roughly put, the plan would have shifted economies of scale in the lender-placed business to Fannie Mae itself rather than the individual servicer, a move the OSC executive said would level the playing the field between larger and smaller players as well as reduce costs.
“It consisted of Fannie purchasing insurance directly from OSC to ensure all loans that had force-placed insurance on them allow the individual servicer to approach the current provider and match the rates Fannie would have been able to procure, or continue to use the current tracking provider,” he said.
Coverage prices, the OSC executive said, should be “proportional to the size of the risk, not the size of the servicer.”
The coverage would be provided through an OSC consortium where the company would act as managing general agent and managing general underwriter on behalf of multiple carriers.
“We would pool the risk and take a pro-rated portion of that risk,” he said, comparing it to a situation similar to the way a company like Lloyds of London syndicates risk, with it distributed among multiples parties where no one entity has responsibility for, say, more than 50% of the risk or less than 10%.
Although the Fannie Mae reform effort is in limbo, the OSC EVP feels other forms of reform are making some headway and reform has been needed in terms of some questionable practices on the part of some market participants.
“Many mortgage servicers were receiving commission,” he said, citing an example. “The reality is nothing wrong with commission as long as there is a value added” but that was not always the case, in his opinion.
Similarly, the OSC executive said reinsurance agreements are fine, “as long as there is real risk transference” but he believes this has not always been the case.
Interestingly, he said, this is not the first time there has been LPI reform and litigation. Back in the 1980s and 1990s there was a wave of class action lawsuits in the auto insurance and loan market critical of similar practices.
The industry, the OSC EVP said, “needs to continue to change.
“The competition needs to be increased.”
Even if the previous Fannie Mae effort is not revived the concept may be used in the private market, he said, noting “We have had large servicers approach us along lines of what we do for Fannie Mae.”
