UPDATE 1-US housing finance regulator considers insurance suits

Wed Jun 25, 2014 5:40pm EDT

(Adds report details, lawmaker comment)

By Jason Lange and Dena Aubin

WASHINGTON, June 25 (Reuters) - A U.S. housing regulator will look into whether lawsuits should be filed by government-controlled mortgage finance firms Fannie Mae and Freddie Mac against companies that left them on the hook for overpriced insurance, a 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.

Fannie Mae and Freddie Mac are owned by U.S. taxpayers, who 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.

A spokesman for Assurant said the company is reviewing the report.

"Protecting homeowners and investors with lender-placed insurance is a commitment we share with the FHFA and the Inspector General," Assurant spokesman Robert Byrd said.

A spokesman for QBE did not immediately respond to a request for comment.

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.

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.

Insurance regulators in New York, Florida and California determined that Assurant, QBE and their subsidiaries charged excessive rates, the report said. Costs may have been driven up in part by profit-sharing deals between mortgage servicers and the insurers, the report said.

In a response to the report, the FHFA said it will look into litigation and complete its assessment within 12 months.

U.S. Representative Maxine Waters of California, who is the ranking Democrat on the U.S. House Financial Services Committee, applauded the report.

"The IG report documents troubling sweetheart contracts between force-placed insurers and mortgage servicers that have long driven up costs for borrowers," she said in a statement.

Given the enormous overpayments by Fannie and Freddie for the insurance, she said, "the FHFA should take steps to hold any and all wrongdoers accountable."

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. (Reporting by Jason Lange, additional reporting by Dena Aubin; Editing by G Crosse and Jonathan Oatis)