WASHINGTON – Companies overseeing millions of mortgage loans appear to be skirting new federal regulations and legal settlements intended to stop them profiteering at the expense of troubled homeowners.
They are selling or have sold nearly nonexistent insurance agencies – in some cases with no offices, no websites and only a single registered agent – in multi-million dollar deals, as new rules prohibit them from collecting commissions on insurance they force homeowners to buy.
The deals illustrate how regulators are still wrestling with messy banking practices more than six years after the housing market's collapse. They also mean that newly sold insurance agencies have an incentive to compel struggling homeowners to buy costly policies, to justify the high sales prices commanded when the insurance agencies were sold.
The deals involve "force-placed insurance," a type of backup property insurance meant to protect mortgage investors' stake in uninsured properties. Standard mortgages require borrowers to maintain homeowners insurance and authorize the loan's servicer to buy coverage when borrowers don't. If the borrowers don't pay for the new insurance, servicers foreclose on their properties and stick the bill to mortgage investors.
Even before the housing boom, mortgage servicers found ways to profit from buying insurance with other people's money. Insurance carriers paid banks including JPMorgan Chase, Wells Fargo and Citigroup to buy policies at inflated prices, according to an investigation by New York's Department of Financial Services. To hide this "kickback culture," as New York regulators described it, some servicers created virtual insurance agencies and disguised illicit payments as commissions.
New rules by the Federal Housing Finance Agency, investigations by state regulators and class-action settlements now prohibit servicers from collecting commissions on such insurance policies, and the country's biggest brand-name banks have renounced the practice.
But some of the largest subprime mortgage servicers in the country – companies that handle the troubled loans most likely to be subject to the insurance policies – appear to skirt those rules or have already made profitable business arrangements that comply with them.
Because people tend to stop paying insurance when they're struggling to keep up with their mortgage, the collapse of the housing market after 2007 turned the practice into a multi-billion dollar industry. In many ways, force-placed insurance's rise reflected the behavior that fed the housing bubble: After profiting from putting borrowers in homes they couldn't afford, mortgage companies were profiting from inflated insurance bills they assigned to homeowners at risk of foreclosure.
The country's second largest non-bank mortgage servicer, Nationstar Mortgage Holdings Inc., has been trying to sell an insurance agency for roughly $100 million, according to people familiar with the deal who spoke on condition of anonymity because they were not authorized to discuss the sale.
Nationstar's insurance agency, Harwood Service Co., has no website and no independent offices. The switchboard operators at Nationstar's headquarters in Lewisville, Texas, said they haven't heard of it. Employees of Assurant Inc., the insurance carrier whose policies Harwood sells, say the company is "just the name used when Nationstar refers us business."
Harwood's only registered insurance agent, a Nationstar consultant named Dennis DiMaggio, initially told The Associated Press he was semi-retired. Asked how he could run a $100 million business in semi-retirement, DiMaggio ended the call then later said he had been joking.
Nationstar's first attempt to sell its affiliated insurance agency fell through early this month after the AP raised questions about the deal, prompting New York's Department of Financial Services to look into the deal.
"We have some concerns with the proposed transaction," said Matt Anderson, a spokesman for the financial regulator, four days before the expected buyer withdrew. Nationstar is still seeking to sell the insurance agency, said one person who is familiar with its efforts but not authorized to discuss its business affairs.
Nationstar declined to discuss details of Harwood's business. Assurant Inc. also declined to discuss its relationship with Nationstar. The insurer said it complies with the federal government's new rules against affiliate commissions but "may pay commissions to unaffiliated agents in compliance with laws and regulations for work performed."
In court, however, Assurant and Nationstar have not defended their arrangements. Earlier this month, the companies reached a deal to settle a class-action lawsuit in the U.S. District Court for the Southern District of Florida that alleged Harwood exists solely to "funnel profits " to Nationstar at borrowers' expense.
If Nationstars' attempts to sell Harwood are successful, the deal would render the agency immune from bans on commissions – much as a similar agency owned by the country's largest subprime mortgage servicer already is.
That servicer, Ocwen Financial Corp, oversees more than one-quarter of the country's outstanding subprime loans, according to data from trade publication Inside Mortgage Finance. Last March, Ocwen sold off a force-placed insurance affiliate called Beltline Road Insurance Agency as part of an $86 million deal with Altisource, a company spun out Ocwen in 2008, led by former Ocwen executives and partially owned by Ocwen's founder.
The deal closed the same month that the Federal Housing Finance Agency formally proposed banning commissions and New York reached a legal accord with Assurant, OCwen's principal force-placed insurer, banning payments to affiliates like Beltline. By selling the company to Altisource, however, Ocwen got cash upfront – and handed the lucrative business of collecting commissions to Altisource, a company characterized in financial filings as a related party.
In a statement to the Associated Press, Ocwen noted that it had only owned the insurance agency for a short period after acquiring it along with the assets of a smaller mortgage servicer. Ocwen no longer collects any commissions from Beltline and sold the agency to Altisource solely because the agency didn't fit in with Ocwen's business model, the company said. Altisource, which does collect commissions on Ocwen's force-placed insurance, did not return calls and emails from the AP over several weeks seeking comment.
Ocwen and Nationstar service roughly 5 million home loans. The third-largest servicing company, Walter Investment Management Corp., paid $53 million on 147,676 such insurance policies on its portfolio of 1.95 million loans in the first three months of this year, according to its Securities and Exchange Commission filings. If Nationstar and Ocwen were billing for policies at the same rate, their practices could be affecting more than 350,000 borrowers nationwide.
It's unclear how or whether the Federal Housing Finance Agency, the industry's principal U.S. regulatory agency in Washington, will respond to such sales. In a statement, it expressed concern about the deals but said it could not stop servicers from selling their insurance agencies.
"If servicers are circumventing the Enterprise lender-placed insurance requirements, we will work with Fannie Mae and Freddie Mac to address it," the agency said.
Walter disclosed in its SEC filings that rules banning commissions will cost it roughly $20 million a year and said it is "actively looking at alternatives" to giving up the cash. A spokeswoman, Whitney Finch, declined to explain further but said the company will comply with all rules and regulations.
Another company, Carrington Mortgage Services LLC of Santa Ana, California, didn't sell its insurance agency. It just agreed to let someone else collect the profits.
In an Irish bond prospectus filed last year, Carrington's parent company disclosed that a buyer had paid it $21.25 million in late 2012. If Carrington doesn't send back at least that amount to the agency's buyer in commissions, it will have to give back some of the money it received.
Carrington executives denied that its obligation to deliver $21.25 million of commissions would in any way affect homeowners or mortgage investors, and noted that it is not subject to the finance agency rules because it services loans owned by private investors. In its Irish prospectus, however, Carrington warned that some regulators believe the commissions "may constitute an improper 'kickback'," and added: "Should any regulator decide to take action, we may be forced to pay restitution."