In 2012, lender-placed insurance issues cost Fannie Mae [1] and Freddie Mac [2] a combined $360 million, and now the federal government may take legal action against servicers for charging excessive LPI rates, according to a report [3] released Wednesday by the Federal Housing Finance Agency’s Office of the Inspector General [4].
The report comes on the heels of several lawsuits‒‒most of which have been settled out of court and for substantial amounts of money‒‒that borrowers have filed against the nation's top lenders in the past few years. Wells Fargo [5] and QBE [6], for example, settled a class action suit in Florida last spring for $19 million and agreed to reimburse or credit affected borrowers 25 percent of any LPI premiums they assessed.
Last September, JPMorgan Chase [7] and Assurant [8] settled with a nationwide class of borrowers for $300 million and agreed to reimburse or credit affected borrowers 12.5 percent of any LPI premiums they assessed. And in February, Citibank [9] and a class of borrowers agreed to a $95 million settlement in which the lender also agreed to reimburse or credit affected borrowers 12.5 percent.
The trouble itself stems from GSE-serviced mortgage holders defaulting on Fannie/Freddie-required coverage. Fannie and Freddie's servicers are required to ensure that their client homeowners maintain hazard insurance for the life of the mortgage. These servicers often outsource the tracking of this insurance and the payments to specialty insurers.
When an insurer identifies a payment lapse it initiates LPI coverage, which homeowners are expected to keep up with. However, not all do, and in the event of a foreclosure Fannie and Freddie get stuck with the bill.
In 2012 and 2013, insurance regulators in several states determined that LPI rates in their respective states were excessive and may have been driven up by profit-sharing arrangements under which servicers were paid to steer business toward LPI providers in the form of commission structures and reinsurance deals.
This, of course, led to the class-action suits that have so far amounted to $674 million in settlement payments. Last November, FHFA sought to mitigate financial harm to Fannie and Freddie by directing them to prohibit their servicers from receiving LPI-related commissions and entering into reinsurance arrangements with LPI providers. But those new rules did not take effect until June 1 and the grand total for how much the GSE’s are out due to LPI-related issues is not yet clear.
FHFA is still considering whether Fannie and Freddie should pursue litigation against servicers and LPI providers to recover potential damages that the enterprises have lost cleaning up LPI-related messes.