NU Online News Service, March 9, 3:34 p.m.EST

The head of the Consumer Financial Protection Bureau willpropose regulations this year imposing strict limits on use offorce-placed insurance for homeowners' rising to a place of concernamong consumer advocates where it should not be an industry expertsays.

In a speech Tuesday to state attorneys general addressing themortgage crisis, the director of the new federal Consumer FinancialProtection Bureau, Richard Cordray, says his agency will issuerules “to prevent (mortgage) servicers from charging for thisproduct unless there is a reasonable basis to believe thatborrowers have failed to maintain their own insurance.”

As Cordray made his announcement, officials at the FederalNational Mortgage Association say it is moving to impose tightercontrols on force-placed insurance.

Fannie Mae also took action, saying it would solicit proposalsfrom insurance companies seeking to compete for its force-placedbusiness.

Industry officials say that if Fannie Mae tightens controlover force-placed products, it would be a change from currentpractices.

Forced-placed insurance, which is homeowners coverage placedwhen the owner fails to secure it on his or her own, has now risento the top of the list of concerns consumer advocates and theirgovernment supporters have with insurance products, a positionRobert Hartwig, president and chief economist at the InsuranceInformation Institute, says that singling out the product isunfair.

He says the problem is not with insurers, but lenders becauseeach lender manages its own business relationship with force-placedinsurance providers.

Benjamin M. Lawsky, New York State Superintendent of FinancialServices, says in an interview with National Underwriterthat, “As the regulator, we have been conducting a far-reachinginvestigation since the day we opened the doors as the newDepartment of Financial Services on Oct. 3.”

He says force-placed insurance “has been and will continue to beone of our top objectives.”

He adds, “We believe our investigation will expose just how badthis problem is; get to the core of why this insurance is sooutrageously priced; hold those responsible accountable, andproduce real long-term, enforceable solutions.”

According to consumer advocates participating in the NAIC'sConsumer Liaison Committee meeting last Saturday in New Orleans,the market is dominated by two players, QBE, an Australian-basedfirm which acquired Balboa Insurance from the Bank of America, andAssurant.

Assurant has 65.5 percent of the market; QBE 34.2 percent,according to the data presented at the meeting by consumerrepresentatives.

The product is very expensive, two to four times as expensive asa voluntary market homeowner's policy, according to PeterKochenburger, from the University of Connecticut, and BirnyBirnbaum, of the Center for Economic Justice in Austin, Texas.

Based on research by Birnbaum, the market has soared in recentyears, growing from $1.49 billion in 2004 to $5.57 billion in 2010.Birnbaum says his data indicates that over that period, the lossratio has dropped from 33.1 percent to 24.3 percent.

But Hartwig contends it is unfair to pillory the business. Hesays force-placed insurance “is more expensive because the insurerby prior arrangement with banks, agrees to insure these homes sightunseen and instantly.” That is different from the way insurance isnormally sold, says Hartwig, when the risk is examined andunderwritten. “Obviously, that increases the risk. Many factors areinvolved in homes involved in foreclosure procedures and that alsoincreases risk.”

Because force-placed insurance is associated with theforeclosure process, Hartwig says the home “could be abandoned;subject to vandalism, or theft of copper pipes, or heating and airconditioning units; and, there could be other issues, such as fireor water damage; or frozen pipes stemming from neglect, as well asfire.

“The threat of all of these is greatly enhanced in homes thatare being foreclosed upon,” he says.

Hartwig also notes that, “If people don't want a force-placedpolicy, they have the option of reinstating their standard existingpolicy. The only reason it exists is that people stop paying theirhomeowners insurance, leaving the bank in the position of payingfor the loss.”