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Kickback investigation hits private mortgage insurers
Private mortgage insurance (PMI) is an important tool for homeowners who want to finance or refinance their homes. But federal and state officials are investigating whether some insurers are paying kickbacks to lenders to generate business, forcing borrowers to pay more for PMI.
PMI protects lenders against loss if buyers default on loans. Generally, the higher the down payment, the lower the perceived risk. Many lenders require at least 20 percent down payment to finance a home without PMI.
"PMI enables borrowers with less cash to have access to home ownership," states a Federal Reserve Bank of San Francisco bulletin. "With this type of insurance it is possible to buy a home with as little as a 3 percent . . . down payment."
PMI has also proven useful in two federally sponsored programs:
- Under the Home Affordable Modification Program (HAMP), homeowners who are behind on payments can have their mortgages modified.
- The Home Affordable Refinance Program (HARP) assists homeowners who are keeping up payments but are unable to secure traditional refinancing because of their property's declining value.
"Since the programs were initiated in 2009 . . . the total volume of mortgages that carry PMI on HARP, HAMP or other modified loans reached $75 billion and benefited more than 437,000 households," says Gaye Torrance, spokesperson for the Mortgage Insurance Companies of America (MICA).
From kickbacks to reinsurance
Legislators have long feared that lenders would take kickbacks to "steer" borrowers who want to buy or refinance homes toward private mortgage insurers that would charge them more than the going rate.
The Real Estate Settlement Procedures Act (RESPA), passed in 1974, was supposed to put an end to this practice. But now state and federal officials are looking into whether major banks such as Wells Fargo and Bank of America violated RESPA by using "reinsurance" transactions.
Several insurers, including AIG, Genworth and MGIC, acknowledge the ongoing investigation by the Consumer Financial Protection Bureau (CFPB) in recent filings with the Securities and Exchange Commission (SEC). According to the SEC filings, the CFPB is focusing on "captive" reinsurance companies or, simply put, the ones owned by the banks. Numerous consumer finance investigations have been launched by the bureau in recent months.
Here's how they allegedly help each other out: Some lenders have reportedly referred prospective buyers to certain PMI insurers. Those PMI insurers would then buy reinsurance, or backup policies, from units of these same lenders.
Theoretically this put the banks on the hook if the borrower defaulted on the mortgage. But in reality, the deals were structured so that the banks took no risk.
MGIC, a private mortgage insurer, states in its quarterly filing that, "The insurance law provisions of many states prohibit paying for referral of insurance business," adding, "We believe our captive reinsurance arrangements are in conformity with applicable laws."
AIG, Genworth and MGIC had no comment beyond their filings. AIG's filing, however, stated that it was "in discussions" to resolve the matter with a consent order. None of the banks reportedly involved in this case would comment.
The investigation was started in 2008 by the Minnesota Commissioner of Commerce, was taken over by the U.S. Department of Housing and Urban Development, and then transferred to the CFPB, which was created by the Dodd-Frank Wall Street Reform Act of 2010. There was no comment from any of the investigative agencies.
These insurers reported the investigation -- and a possible settlement -- in their most recent quarterly filings. Such a settlement could significantly impact their earnings and could also result in payments to homeowners who were overcharged.
The MICA's Torrance puts the total volume of PMI in force as of July at almost $400 billion and says that dollar volume activity for MICA members rose 88 percent in the second quarter of 2012 as compared to the previous year.
Advice for PMI buyers
Here's some advice for homeowners who have PMI:
- Determine if your lender improperly steered you toward a particular insurer by comparing the rates of various PMI carriers.
- Find out if you can obtain a "piggy-back loan" or second mortgage, which wouldn't require PMI.
- Ask your bank to drop the PMI requirement if your payment record is good. You can ask for the cancellation of PMI when you have 20 percent equity in your home. When your equity reaches 22 percent, lenders are required to cancel your PMI.
- Get an appraisal to show that the value of your property has increased, putting your equity at 20 percent or more, so that PMI is no longer necessary.
The Federal Reserve Bank of San Francisco has created an overview of PMI rights for consumers.
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