FANNIE MAE seeks to reduce Foreclosure costs by changing “Forced Insurance” policies.

Homeowners with mortgages are required to carry insurance policies to protect their property, which serves as collateral for the loans.  Homeowners who are struggling to make their payments sometimes allow their insurance to lapse due to non-payment.  However, lenders can place “forced” insurance policies on these customers which can greatly increase the cost of the monthly payment and escrow.  Force-place policies, as they are known, are issued primarily through just two insurance companies. They are expensive, and some banks are paid hefty commissions for arranging them.  Current force-placed insurance rates are at least twice that of standard homeowners’ policies, regulators say.

This is an additional source of revenue to the lenders and can cause homeowners to dig deeper into default or debt.  Because of the potential loss of revenue these policies provide, Lenders are fighting an effort by Fannie Mae to cut costs on backup insurance policies often imposed on cash-strapped homeowners, a step that would crimp the lucrative fees the lenders collect on the coverage. For months, Fannie has been seeking approval from its regulator, the Federal Housing Finance Agency, to use a consortium of insurers led by Zurich Insurance Group AG that it lined up last year, according to people familiar with the company. Under the new proposed system, Fannie would require banks handling its mortgages to use the Zurich-led consortium, which would charge 30% to 40% less than current premiums, according to the people.