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"Forced-placed insurance" - ever heard of it? It is the insurance a mortgage lender buys when the existing homeowner - frequently when in foreclosure - drops their insurance coverage. And it is really, really expensive. But there may be more to the story.

In an article by Neil Weinberg called Feds Favor Banks over Taxpayers in Home Insurance Tussle, he notes:

American Banker’s Jeff Horwitz has covered the force-placed market in more detail than anyone else in the country over the past three years, and what he’s uncovered is highly disturbing.

For insurers, writing policies sight unseen against the homes of troubled owners is risky, and it’s perfectly understandable that they’d charge relatively high premiums to reflect that. But Jeff uncovered the fact that the cost of force-place premiums swelled beyond reason—to as much as ten times what a regular policy would cost. A big culprit in the gouging appears to be under-the-table payments that insurers make to banks for steering business their way.

More below:

It appears some banks - Wells Fargo is one - actually reduced their forced-placed mortgage premiums after the coverage - even citing Horowitz's coverage as partial cause. But the issue is bigger.

Homeowners are just one class of victims. Taxpayers are another. That’s because when homeowners walk away from their standard and force-placed policies, it’s often the government-own mortgage giants Fannie Mae and Freddie Mac that get stuck with the bills.

Fannie Mae’s price tag for such coverage rose from around $25 million a year before the financial crisis to $631 million in 2012. So about a year ago it started concocting a plan to cut costs by buying coverage directly from the insurers who provide it. Fannie consulted its government overseer, the Federal Housing Finance Agency, throughout the process. It eventually came up with a plan in which a group of insurers agreed to write force-placed policies at a roughly 30% discount.

The FHFA killed Fannie Mae's plan to force the discount. This is something that the Democratic caucus and the White House have to address. The increase in premiums is almost 1% of the sequester amount.

When people talk about "waste and fraud" in government, it is astounding how often the waste and fraud of passthroughs and kickbacks don't seem to be the focus. Well, this one should be.

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