It's spring and the housing market has finally sprung. Homes are selling and prices are rising. But just when homebuyers think it's safe to go back in the murky mortgage water comes ominous news: A federal agency fined four mortgage insurers for paying "kickbacks" to lenders.
When you seek a mortgage, banks may require you to purchase mortgage insurance if you can't make a large downpayment. This protects the lender if the buyer should die, become disabled or lose their job and can't pay the mortgage. Since a bank is among the first stops on a homebuyer's shopping list, the lender can -- and often will -- steer the potential homebuyer to a favorite mortgage insurer. But "steering" comes with a price, and both the insurer and -- the homebuyer -- pay for it.
One hand washes the other
Banks set up reinsurance units, which in turn provide insurance to the mortgage insurers. Mortgage insurers don't really require reinsurance because they already make money with very little risk. But they are more than happy to pay the banks for "steering" business to them. Simply put: Mortgage insurers gave kickbacks to banks' reinsurance units, according to the settlement.
This practice, which went on for over a decade, cost mortgage insurers more than $6 billion, according to the investigation by the Housing and Urban Development Department (HUD) cited in the American Banker. And that $6 billion bill was ultimately passed along to homebuyers as part of the cost of their insurance.
The scam was originally uncovered by the Minnesota Department of Commerce. The convoluted investigation then went through HUD and was finally picked up by the Consumer Finance Protection Bureau (CFPB), which was formed under the Dodd-Frank Wall Street Reform Act of 2010. But nothing happened until this April, when the CFPB announced that it was fining four mortgage insurers a total of $15.4 million.
Drop in the bucket
So what's wrong with this picture? First, it shows that crime pays. The illegal collaboration of mortgage insurers and banks netted them billions. So paying a fine of several million is a drop in the bucket.
Secondly, the CFPB settlement -- which includes monitoring these guilty insurers -- only lasts for 10 years. But this timeframe begs the question: If it's wrong, shouldn't the practice simply be stopped?
Third, the so-called fines weren't even levied on the mortgage lenders -- the banks -- which are free to do business with any mortgage insurer that still wants to give them a kickback. And these unrepentant mortgage insurers are still operating. One even announced in a filing with the Securities and Exchange Commission that it was under investigation by the CFPB -- but hasn't yet settled.
The CFPB's director of enforcement said there was "more work to do," indicating that his agency could go after the lenders which were taking the kickbacks. But if the "fines" levied are anywhere as low as those that the mortgage insurers received, it won't put a dent in the bottom line of big banks such as Wells Fargo and Bank of America -- both of which already settled similar class action lawsuits.
Mum's the word
Birny Birnbaum, a consumer advocate with the Center for Economic Justice, says the real blame is with state insurance regulators across the country who didn't stop these kickbacks years ago.
"To the extent that this settlement ends kickbacks, that reduces the cost to consumers and benefits the housing market, and I'm pleased to see the CFPB take action," says Birnbaum. "But why did state regulators allow these transactions to be created in the first place? They have abdicated their responsibility. They are doing a poor job."
When I called the National Association of Insurance Commissioners for a response, a spokesperson listened politely. No one ever called back.