The Ottumwa Courier

AP National

June 25, 2014

US weighs lawsuits on alleged insurance kickbacks

WASHINGTON (AP) — The government is considering whether to sue banks and other mortgage servicers to recover its losses from alleged insurance kickbacks that may have cost government-controlled mortgage giants Fannie Mae and Freddie Mac hundreds of millions of dollars, according to an internal report.

The Federal Housing Finance Agency, which is responsible for guarding Fannie and Freddie's finances, told its inspector general's office that it will consider filing the lawsuits and will make a formal decision over the next year.

Fannie Mae and Freddie Mac, which have been under the FHFA's conservatorship since 2008, lost an estimated $168 million from the fees in 2012 alone, according to the report by the FHFA's inspector general. The FHFA didn't accept the inspector general's estimate of damages, but the agency's official response to the report said it "does not object" to the recommendation that it consider suing.

Banks and other mortgage servicers that might be subject to such lawsuits did not immediately respond to phone calls and email messages seeking comment on the threat of litigation.

Though the FHFA barred banks and other mortgage servicers from collecting payments from insurers on June 1, the agency does not normally discuss prospective litigation and has not previously indicated that it might consider suing over past misbehavior.

Should the FHFA decide in favor of such litigation, the lawsuits could reopen a controversy over how the country's biggest banks profited from what is known as "force-placed insurance," a high-cost version of property insurance that protects the homes of uninsured borrowers. Typically purchased by banks when a borrower falls behind on mortgage and insurance payments, force-placed insurance ballooned into a $1 billion-a-year industry after the 2008 housing bust.

According to a 2012 investigation by New York's Department of Financial Services and a slew of private lawsuits, large banks and insurers colluded to inflate the price of force-placed insurance, splitting the profits. Insurers paid banks for referring business. Struggling homeowners and mortgage investors like Fannie Mae and Freddie Mac bore the cost in the form of higher insurance premiums, often many times the price of normal homeowners insurance.

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