WASHINGTON, March 26 A U.S. regulator on Tuesday outlined possible guidelines to help homeowners avoid high-price property coverage by trimming or even banning certain fees paid by insurers to banks on so-called force-placed insurance.
All mortgages require homeowners to maintain insurance on their property. Most mortgages also allow the lender to purchase insurance for the home and "force-place" it if a policy lapses or borrowers stop paying their insurance bills.
Force-placed policies are often taken out by banks or other lenders on homes where the owner does not have sufficient or any coverage. State and federal regulators have often accused insurers of artificially inflating the charges for such policies.
The Federal Housing Finance Agency, which regulates mortgage finance companies Fannie Mae and Freddie Mac , published guidelines that may lead to restrictions on those fees and commissions banks collect from insurers on force-placed insurance.
The regulator is seeking input from the industry on possible changes. Following a 60-day period, the FHFA will determine whether Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs), will implement those guidelines to change some of the force-placed industry's compensation methods.
Premiums for forced-placed, or lender-placed, insurance are often double those for voluntary insurance and in some instances are significantly higher, according to the FHFA.
"FHFA recognizes that some greater risks are involved with lender placed insurance," the regulator stated. "In order to keep lender placed insurance costs to the (GSEs) as low as possible, practices that provide incentives for or do not deter higher costs should be avoided."
Homeowners can avoid force-placed insurance if they remain current on their mortgage. Many who experience coverage gaps have severe financial problems that lead them to stop paying their insurance bills.
Forced-placed policies were widespread during the recession, as delinquencies swelled and homeowners effectively stopped paying their insurance since premiums are often included in monthly payments.
Since then, the fee structure has garnered scrutiny, and some critics say it has allowed banks to gain financially when more expensive homeowners' policies are implemented than might otherwise be necessary.
The regulator's final decision would affect all mortgages guaranteed or backed by Fannie Mae and Freddie Mac. The two companies, which provide the financing for about two-thirds of all new U.S. home loans, are often exposed to potential losses for the costs for unpaid insurance fees, the FHFA said.