Counterparties: Kicking the kickback habit

March 26, 2013

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The FHFA today announced that it might finally do something about the force-placed insurance industry, a particularly lucrative — and scandalous — corner of the mortgage industry.

Jeff Horwitz, who has been leading on this story since 2010, says that the long-overdue move is a “blow to banks and other mortgage servicers.”

Horwitz’s original report explains what the problem is: mortgage servicers foist overly expensive and unnecessary insurance policy on homeowners. When a homeowner lets their property’s insurance policy expire, the mortgage servicer can step in and buy a policy on the homeowner’s behalf. This is meant to protect both homeowner and the lender, but it quickly becomes egregious: homeowners were often stuck with insurance that cost 10 times more than their previous policies. In turn, mortgage companies made millions for referring homeowners toward specific insurance companies.

FHFA’s proposal is pretty simple: it bans the kind of payments between insurance companies and mortgage servicers that Horwitz likened to “simple kickbacks”. Not surprisingly, pushing homeowners into pricy policies they didn’t need was very profitable. JP Morgan reportedly made $600 million since 2006 through its relationship with Assurant, one of the largest force-placed insurance companies. One report found that 15% of force-placed premiums go straight back to banks.

The crackdown on kickbacks is also a long time coming. FHFA, the Fannie Mae and Freddie Mac regulator run by the widely criticized Ed DeMarco, privately announced to industry execs in February that the agency had killed a force-placed insurance reform that would have saved taxpayers at least $145 million annually.

As Karen Weise notes, FHFA is also lagging states. Last week New York announced a $14 million penalty and settlement with Assurant. This follows actions by a handful of state actions, including by Florida and California.

Assurant, meanwhile, told the WSJ it’s premature to speculate about the effect of FHFA’s proposals. In some sense, Assurant is right: its stock was actually up today — to a new post-crisis high — and the public is now free to comment on the proposal, as are Assurant’s lobbyists. The industry that has received many millions in kickbacks for overcharging homeowners will now have 60 days to comment on how it feels about losing out on those kickbacks. — Ryan McCarthy

On to today’s links:

Ugh
TurboTax is fighting to keep simple, free tax filing from becoming a reality – Liz Day

Data Points
A majority of Americans, and 70% born after 1981, support gay marriage – Ezra Klein

Facebook
Nasdaq is paying $62 million to market makers who lost $500 million in Facebook’s IPO – Reuters

Welcome to Adulthood
Almost half of all college grads are underemployed — and likely to stay that way – WSJ

Tax Arcana
Tax havens are the biggest source of foreign investment in the BRICS – Quartz

Alpha
The second-largest pension fund in the US may switch entirely to passive investing – Investment News
“Don’t do it CalPERS! If you’re not allocating capital to its most productive uses, who is?” – Matt Levine
Steve Cohen bought a Picasso for $155 million “as a gift to himself” – NY Post

Housing
Another great housing report: Home prices up 8.1% over last year, Phoenix up 23% – S&P
“All 20 cities posted annual increases in January, as New York ended a string of annual declines” – WSJ

Wonks
“It’s not a question of whether these things should or shouldn’t be traded… It’s simply that they cannot be” Noah Smith

Goldbuggery
“Money has always been whatever society agrees on” – Armstrong Economics

Sad Declines
My tweets! The hashtags do nothing! – Nieman Lab

Huh
Almost half of surveyed US workers haven’t noticed the higher taxes they’re paying – WSJ

Real Talk
Repeat after me: “A country is not a company” – HBR

Terrifying
Buzz Bissinger spent $587,412.97 on clothes in three years – GQ

Crisis Retro
FYI: Hiring Dick Fuld “might attract negative publicity” – WSJ

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