The controversial practice of banks forcing expensive homeowners insurance on borrowers could come to an end after Fannie Mae told lenders it would seek to oversee such policies itself.
Government-controlled Fannie Mae, the biggest source of money for U.S. home loans, notified lenders of the planned policy change in a recent bulletin, a copy of which was obtained by Reuters.
"Fannie Mae will soon implement changes to its Lender-Placed Insurance (LPI) requirements to significantly reduce costs to homeowners, taxpayers, and Fannie Mae," it said, adding that it has issued a request for proposals to insurance companies to compete for the business.
"The (proposal) is structured to ensure that insurance costs are significantly reduced," Fannie said. Fannie Mae also said it would issue guidelines to mortgage servicers on when and how to obtain what are often called "force-placed" policies, and on what costs would be reimbursable.
Force-placed insurance has long been controversial because homebuyers are made to purchase such policies, which protect their lenders, and the costs are typically much higher than traditional homeowners' insurance.
In many cases, the policies are sold by insurance companies owned by the lenders, or by insurers with whom the lenders have a financial relationship.
New York financial regulators have been investigating the practice, issuing subpoenas in January to roughly two dozen insurers and mortgage servicers.
American Banker first reported the details of the Fannie bulletin.
© 2016 Thomson/Reuters. All rights reserved.