WE’RE HEARING some of the dirty little captive mortgage reinsurance entities lenders created to snare a percentage of premiums were not facades and actually paid claims on defaulted loans.
While these reinsurance entities may have been designed to pay few if any claims, it turns out they paid substantial claims due to the severity of subprime meltdown and massive foreclosures.
In taking enforcements actions against four private mortgage insurance companies, the Consumer Financial Protection Bureau said the private MIs funneled millions of dollars to these reinsurance entities.
“The CFPB believes the mortgage insurers named in the enforcement provided kickbacks to mortgage lenders by purchasing captive reinsurance that was essentially worthless but designed to make a profit for the lenders.” the bureau said.
But sources indicate the MIs did lay off credit risk on the lenders. And due to the catastrophic losses, it reduced the MIs’ exposure.
There are still MI policies in effect where reinsurance was sold to the lenders. But new policies have not been issued for several years.
RESPA attorney Philip Schulman noted that consumers were not affected by captive reinsurance arrangements. “There were no additional charges to consumers. For them it is neutral,” the K&L Gates partner said.
MI rates are set by the state regulators. So borrowers paid the same premiums whether the lender had a captive reinsurance arrangement or not.
However, the CFPB argues the reinsurance arrangements resulted in “illegal kickbacks” to lenders for the referral of business, which distorts markets.
Exposing these captive reinsurance arrangements now will make sure these entities don’t reappear in the mortgage world again.
It will also be a relief for the mortgage insurers, according to Ed Mills, a financial policy analyst at FBR Capital Markets.
“By ending these captive insurance agreements, it no longer requires them to cede part of their premium to these lenders,” Mills said.
“They will be more profitable because of that,” he added.
But the MIs are not cheering yet. The CFPB levied fines against Genworth Mortgage Insurance Corp., United Guaranty Corp., Radian Guaranty Inc. and Mortgage Insurance Corp., totaling $15.4 million.
Now the CFPB is investigating the lenders.
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SHOUT OUT: We’ve been giving a shout out each week to companies that are helping resolve our tepid national and housing recovery by hiring ten or more new people. This morning we reported for the most recent month, mortgage firms added 700 new jobs. This week’s shout out goes to Safeguard Properties, the nation’s largest field service company serving the mortgage industry, announced the opening of its new operation in Richardson, Texas, adding more than 200 jobs. Functions to be performed at the new facility include client account relations, operations, loss management, field quality control and code compliance. The new facility became fully operational this week.
Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.
