In an article in today’s DBR by John Pacenti, I weigh in on forced-place insurance policies. The article addresses the new restrictions by the Federal Housing Finance Agency that aim to prohibit mortgage services from being reimbursed for expenses associated with captive reinsurance arrangements. Pacenti also quotes a prior blog post that I co-authored with associate Anthony Narula.
Please click here to read the full article.
It looks like yet another illegal kickback scheme involving mortgage insurance has been uncovered in the residential mortgage industry. Recently the Consumer Financial Protection Bureau (“CFPB”) filed a lawsuit in the U.S. District Court for the Southern District of Florida against Republic Mortgage Insurance Company (“RMIC”), alleging that it had developed an illegal scheme in which it paid kickbacks to residential mortgage lenders in exchange for business. Interestingly, these allegations come in the wake of recent reports that private mortgage insurers have returned to profitability after the housing crisis.
In relevant court pleadings, the CFPB alleged that RMIC entered into agreements through which it paid illegal kickbacks, or otherwise unearned fees, under the pretext of reinsurance premiums. RMIC allegedly made those illicit payments to captive reinsurance affiliates of lenders providing residential mortgage loans. In return, RMIC obtained private mortgage insurance referrals from those residential lenders, in violation of the Real Estate Settlement Procedures Act (RESPA). According to the CFPB, the North Carolina Department of Insurance was already supervising RMIC’s resolution of outstanding insurance claim obligations through an independent court-approved corrective plan.
Under a proposed consent order, RMIC has agreed to pay a fine and end its practice of doling out kickbacks to residential mortgage lenders in exchange for business. “Kickbacks for mortgage insurance referrals are illegal, and can drive up costs for consumers seeking to buy a home,” said CFPB Director Richard Cordray in a statement. “The order announced today will put an end to this practice and require RMIC to pay a $100,000 penalty for violating the law.” Continue Reading
Last Friday, the Federal Housing Administration announced that it will reduce the maximum threshold for the high-price mortgages it is willing to insure. This change was called for by the Housing and Economic Recovery Act of 2008, but was delayed several times in response to continuing economic turmoil. Currently, in the highest cost areas, the FHA insures mortgages up to $729,750. Starting January 1, 2014, this figure will be reduced to $625,500. The change is predicted to impact new mortgagors in about 650 counties nationwide.
The FHA was created after the Great Depression to stabilize the housing market by selling mortgage insurance to homebuyers. Mortgage insurance mitigates the risk to originators and investors in the event of a borrower’s default, thereby lowering down payments and increasing buyers’ access to financing. The agency, now subsumed under the Department of Housing and Urban Development, has approximately five million mortgages in its portfolio.
Add yet another major settlement to the still-growing list of huge payouts by the nation’s largest banks to settle claims over toxic mortgage-backed securities. Bank of America has now agreed to pay $404 million to Freddie Mac to resolve all repurchase liabilities on home loans that it sold to the government-controlled mortgage company from 2000 to 2009. The settlement covers approximately 716,000 loans.
The List of Large Settlements Continues to Grow
Since 2010, Bank of America has agreed to pay more than $45 billion to settle various claims stemming from the U.S. housing and financial crisis, including a prior settlement to pay Freddie Mac $1.35 billion primarily to address loans sold by Countrywide Financial, which was acquired by Bank of America in 2008. Meanwhile, since September of this year, Freddie Mac has agreed to four other similar settlements stemming from repurchase liabilities, including deals worth $480 million with J.P. Morgan Chase, $65 million with SunTrust, $869 million with Wells Fargo, and $395 million with Citigroup.
On Tuesday, the United States Justice Department announced that it finalized a settlement agreement with JPMorgan Chase for $13 billion. This settlement will resolve a multitude of state and federal investigations into JPMorgan Chase’s sale of residential mortgage-backed securities to investors between 2005 and 2008. In addition to paying fines for securities violations, the proceeds from the settlement will be further distributed to compensate investors who relied upon representations made by JPMorgan Chase as to the value of the securities it sold on the secondary market. $4 billion of settlement funds is earmarked for consumer-related relief such as mortgage write-downs and payment reductions. In total, this settlement is the largest ever reached between any company and the government in U.S. history.
Bank of America and Freddie Mac are currently attempting to resolve a mortgage repurchase dispute in which Freddie Mac claims that Bank of America should have to buy back more than $1.4 billion in mortgage loans it claims were defective. The Wall Street Journal has reported that Bank of America, which is still recovering from its 2008 acquisition of Countrywide Financial, would like to reach an agreement by the end of the year. If that occurs, it will be the second such settlement between Bank of America and Freddie since 2011.
In January of that year, the two giants reached a $1.35 billion settlement in a dispute over loans sold by Countrywide. The initial settlement covered all loans sold to Freddie from 2005 through 2007. As we previously noted, within months of announcing the settlement, its terms were highly criticized by the FHFA Office of Inspector General as being based on a gross understatement of the exposure Freddie Mac faced in respect of those loans.
As of September 30, 2013 federal filings indicate that Freddie Mac has outstanding repurchase demands of $1.4 billion against Bank of America (which amounts to about 42% of all of Freddie’s currently outstanding repurchase demands). While we have not yet seen anything definitive, it has been reported that the $1.4 billion in outstanding demands, and the possible settlement thereof, relate to loans sold by Bank of America/Countrywide to Freddie during the period of 2000-2005. Continue Reading
Late last month, we commented on JP Morgan Chase’s $5.1 billion settlement with the Fair Housing Financing Agency (FHFA), as conservator of Fannie Mae and Freddie Mac. The Wall Street Journal has since reported that JP Morgan will be able to deduct that entire amount on its 2013 tax returns, allowing the company to reap a $1.5 billion tax windfall. Experts estimate that a large portion of the remaining final settlement, estimated at a total of $13 billion, may also be deductible. While JP Morgan has refused to comment about whether it will actually invoke the deductions, the revelation has greatly distressed observers, including Congress.
Newly Proposed Legislation Seeks to Close Tax Loophole
Outrage over the deductibility of the JP Morgan settlement has fueled the introduction of two bills in the U.S. House of Representatives: the Government Settlement Transparency and Reform Act, introduced by representatives Jack Reed (D., R.I.) and Charles E. Grassley (R., IA), and the Stop Deducting Damages Act, introduced by representatives Peter Welch (D., VT), a J.P. Morgan stockholder himself, and Luis Gutierrez (D., IL.).
Generally speaking, fines and penalties intended to punish and deter illegal conduct are not deductible, but compensatory payments are, as ‘ordinary and necessary’ costs of doing business. Settlements like those reached between the FHFA and JP Morgan last month, and between the FHFA and Wells Fargo this month, often fail to specify which portions of the total settlement amount are punitive in nature, creating a tax loophole for the defendants. The newly proposed legislation seeks to close that loophole. Continue Reading
I will be a panelist at the Mortgage Bankers Association’s (MBA) upcoming Accounting and Financial Management Conference 2013 in Boca Raton, Florida. I will participate in a session on November 20 at 4:15pm entitled “Managing and Accounting for Risk of Repurchases, Indemnifications and Compensatory Fees.”
Brandon Coleman, CPA, a partner in Deloitte’s Accounting National Office, will join me as a panelist. The session will address:
• The problems now versus one year ago
• Triggers that investors cite today for repurchases and compensatory fees
• Options for reducing risk of financial harm: representations and warranties and other repurchase defenses, insurance, pursuing recoveries, etc.
• Accounting guidance and reserve issues impacting capital requirements and valuation
The conference will be held November 19-21 at Boca Raton Hotel. Please click here to register for the event.
We recently commented on JPMorgan Chase’s blockbuster agreement to resolve a class-action lawsuit for $300 million brought by more than a million homeowners nationwide. The dispute centered on allegations that Chase profited by collecting kickbacks from insurance companies for imposing force-placed insurance policies at excessive rates on properties that secured its loans where coverage had lapsed or where properties were underinsured. The settlement is anticipated to spark new litigation and encourage similar resolutions in several other related cases pending in the U.S. District Court for the Southern District of Florida.
In a new development announced yesterday, the Federal Housing Finance Agency (“FHFA”) is directing Fannie Mae and Freddie Mac to prohibit servicers from being reimbursed altogether for expenses associated with lender-placed insurance practices. The responsibility of the FHFA as the nation’s housing finance regulator, evidenced by its mission statement, is to “[e]nsure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.”
While framed as a response to consumer complaints, the FHFA’s newly imposed restrictions on GSEs regarding forced-placed insurance appear to be motivated by mounting concern that the questionable practices expose Fannie Mae and Freddie Mac to potential litigation and a further decline in reputation. Continue Reading
Forced-Place Insurance Business Surged Following the Housing Collapse
JPMorgan Chase and Assurant Inc. recently agreed to settle a class-action lawsuit initiated in June 2012 for $300 million brought by a class of 1.3 million homeowners nationwide who claimed that they were overcharged for forced-placed insurance. The plaintiffs have also entered into a separate settlement for $4.75 million with Chase relating to forced-placed insurance for policies covering wind damage. The $300 million settlement relates to polices that cover fire and other risk.
The class-action lawsuit against JPMorgan Chase (as well as other similar actions against Wells Fargo Bank N.A., Bank of America N.A., Citibank N.A., and HSBC Bank Inc.) is pending in Miami before Chief Judge Federico A. Moreno of the United States District Court for the Southern District of Florida. Although Chase entered into the settlement agreement in September 2013, the final approval hearing before Judge Moreno is scheduled for February 14, 2014.