The Federal Housing Finance Agency's proposal to endinappropriate commissions and reinsurance arrangements does not gofar enough to reduce the cost of force-placed insurance, aGeorgia-based insurance broker says.

In a comment letter to the FHFA released this week, officials ofOSC, a unit of Breckenridge Insurance Group, Kenesaw, Ga., says thechanges proposed by the FHFA in March, "will not produce themarket pressures necessary to increase the flow of informationwithin the market, lower barriers to entry and put downwardpressure on premiums."

The proposed FHFA action would bar the so-called"government-sponsored enterprises" from paying commissions to thebanks who service troubled mortgages that the GSEs guarantee.

But Tracey Carragher, CEO of Breckenridge Insurance Group, saysin the comment letter that while "significant attention has beenpaid to the improper commission payments between insurers andservicers and certain reinsurance practices, the [force-placedinsurance] market suffers from a number of serious systemiclimitations."

Chief among these problems, he says, are a lack of competition,overly inflated premiums and poor availability of information,inhibiting tracking of data such as premiums, claims, refunds,deductibles and other variables used to monitor rates and setpolicy.

"Independent investigations have identified situations of'reverse competition' in the [force-placed] market, which have leddirectly to higher premiums, the cost of which is largelyshouldered by the Government Sponsored Enterprises (GSEs), FannieMae and Freddie Mac," Breckenridge/OSC says in the letter. "Takentogether, these issues cost the GSEs, taxpayers and homeowners morethan $150 million annually." 

Last year, Breckenridge/OSC joined with Zurich and others in aproposal aimed at enlarging the force-placed insuance underwritingfraternity so that Fannie and Freddie could reduce the cost ofproviding homeowners insurance to trouble mortgages theyinsure.

Currently, Assurant and QBE control the market.

Under the proposal, Breckenridge/OSC would be the managingagent, and then spread the risk through multiple carries, of whichZurich would be the largest.

Breckenridge/OSC's bid was rejected by FHFA. However, underintense pressure from members of Congress and consumer groups, FHFAwas then forced to come up with an alternative approach to reducethe high cost of force-placed insurance, leading to the Marchproposal.

Force-Placed Lawsuits

FHFA is rewriting the force-placed rules at the same time courtsnationwide, particularly in Florida, are tackling a number ofclass-action lawsuits filed on behalf of troubled homeowners facedwith absorbing the difference between regular homeowners insuranceand the cost of force-placed coverage.

In one lawsuit filed in Miami, a couple with ahome in Golden Beach placed in a force-placed program by J.P.Morgan Chase Bank allege they were charged $54,142.56, compared tothe $5,007 per-year premium charged by its former insurer,state-run Citizens Property Insurance Corp.

The cost was added to the principal of the family'smortgage.

Judge Federico Moreno, chief of the federal district court inMiami, is presiding over five class action lawsuits filed againstJ.P. Morgan Chase, Bank of America, Citibank, HSBC Bank USA andWells Fargo. The lawsuits against Wells Fargo, HSBC, Citi, Chaseand  Assurant. He told lawyers last week that he was goingto set all five cases for trial this year.

Adam Moskowitz, a partner at Kozyak Tropin & Throckmortonand co-counsel in the cases, says Florida has more force-placedinsurance in place than any other state.

In another case, Wells Fargo and QBE agreed May 13 to settle alawsuit in federal court in Miami dealing with force-placedinsurance policies in Florida involving 33,000 borrowers. Thecompanies will pay $19.3 million to compensate the borrowers.

The judge Tuesday preliminarily approved the settlement and setthe case for final action Sept. 11.