House Democrats are demanding an explanation as to why theFederal Housing Finance Agency (FHFA) prohibited Fannie Mae fromexecuting a plan to introduce new specialty lenders into theforced-place insurance market.

In a letter Wednesday to Edward DeMarco, acting director of theFHFA, a group of House Democrats, led by Rep. Maxine Waters,D-Calif., asked for a list of the interested parties—i.e.,insurers, banks and trade groups—that asked the FHFA to stop FannieMae from providing incentives for additional insurers to enter themarket, potentially reducing rates.

In her letter, Waters says, “As you know, the issue offorced-place insurance has long been a focus for us in Congress,like me, who have been concerned with the issue of broad-basedmortgage-servicing reform.”

“Evidence suggests that forced-place insurance can cost up to 10times more than voluntary homeowners' insurance, and that theseexcessive insurance costs increase the debt owed by borrowers andthereby impose unnecessary losses on guarantors such as theGovernment Sponsored Enterprises (GSEs) you are charged withconserving,” Waters continues.

Additionally, she says, mortgage-servicing experts point outthat servicers regularly receive either commissions or reinsurancecontracts from insurers offering forced-place coverage, giving bothparties an incentive to expand the use and price of suchcoverage.

In her letter, Waters asks DeMarco for the specific reasons FHFArejected Fannie Mae's proposal. She further requests the documentsthat formed the basis of the agency's decision, and a descriptionof how “FHFA's decision is beneficial to taxpayers andborrowers.”

Waters' letter was prompted by the FHFA's Feb. 11 decision to stop Fannie Mae from reaching out to aconsortium of new insurers it had asked to provide capacity, andlower rates, to the marketplace.

Zurich has been identified as the anchor insurer in theconsortium of underwriters who had agreed to participate andcompete with the two current major players: QBE and Assurant.

Securities analysts had downgraded Assurant's earnings potentialfor 2013 and 2014 by one-third to reflect Fannie Mae'sproposal.

John Nadel, of Sterne Agee & Leach in New York, said in aninvestor's note last November that Zurich, while a limited playerin the forced-place market in recent years, formerly owned ZCSterling, a top-three player in the market, until it was sold toprivate equity in 2005 and subsequently to QBE in 2008.

Consumer groups had expressed outrage at the FHFA decision.

Representatives of the Consumer Federation of America were upsetthat mortgage-lending-trade representatives were on the conferencecall when the FHFA discussed the issue with Fannie Mae staff andannounced the decision, while consumer groups were not asked toparticipate.