WASHINGTON, June 25 (Reuters) - A U.S. housing regulator should consider directing government-controlled mortgage finance firms Fannie Mae and Freddie Mac to sue companies that sold them overpriced insurance, an internal watchdog at the regulator said on Wednesday.
Overpriced insurance may have cost the companies $158 million in 2012 alone, the Federal Housing Finance Agency's Office of Inspector General said in a report.
"We recommend that FHFA assess the merits of litigation," it said.
Fannie Mae and Freddie Mac are owned by U.S. taxpayers, which bailed out the firms in 2008 during the financial crisis. The FHFA runs the two firms through a conservatorship.
The firms, which guarantee most new U.S. mortgages, are responsible for ensuring homes have insurance against hazards like severe storms and fires. When a borrower enters foreclosure, the companies must pay for the insurance.
The inspector general's report said most of this insurance is provided by two firms - Assurant and QBE Holdings, a unit of Australian insurer QBE Insurance.
The watchdog said litigation could be merited because there were signs the two firms and their subsidiaries may have colluded with intermediaries, resulting in overpriced insurance.
The allegations of collusion arose in lawsuits filed by state regulators, several of which were settled out of court "for substantial sums of money," the watchdog said.
At the same time, the report acknowledged that litigation may not be worthwhile if the legal process proved too costly.
"FHFA should balance the expected cost of such litigation against the expected recovery," it said.
The watchdog said the FHFA had responded to its recommendations with a commitment to complete its litigation assessment within 12 months. (Reporting by Jason Lange, editing by G Crosse)