Salmon: It's Time to Abolish the FHFA

NEW YORK (Reuters Blogs) -- Remember the force-placed insurance scandal, which first came to light back in 2010? Well, despite being addressed in Dodd-Frank, the problem is still there: Loan servicers are buying massively overpriced home insurance on behalf of homeowners, and getting enormous kickbacks from the insurers -- if they don't own the insurers themselves. The victims here are usually the investors who own the mortgages in question -- which means that the biggest victims of all are Fannie Mae and Freddie Mac.

Fannie alone has seen its hazard insurance costs rise from around $25 million a year before the financial crisis to $631 million in 2012. That's real money, and so Fannie came up with a plan to save hundreds of millions of dollars. Rather than paying through the nose for the most expensive insurance the servicers could find, Fannie decided to buy the insurance itself.

Fannie ran this idea past its regulator, FHFA, on February 17, 2012, reports Jeff Horwitz in another one of his fantastic articles on this issue today. Back then, the FHFA had no objections. So Fannie put out an RFP, asking 12 insurers for their ideas. The results can be seen here: The winner was a proposal from Overby-Seawell Company, which proposed a system anybody could join.

OSC excelled at program design, Fannie concluded. It had also pulled off a coup by partnering with Zurich Insurance, a Swiss reinsurer with a $400 billion balance sheet, a superior A+ rating from insurance rating company AM Best and historical experience in the force-placed market.

Zurich stood ready to take on all of Fannie's business if necessary, but under OSC's model, any qualified insurer could take a piece of the GSE's business by joining a consortium of carriers willing to divide Fannie's risk. Among the proposal's attractions were "market driven pricing," and "one entity fully accountable to Fannie Mae and servicers," Fannie documents state.