Mortgage loan companies skirting federal regulations

Almost nonexistent insurance agencies being sold in multi-million-dollar deals
Associated Press
Jul 31, 2014


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.




Regulations.. Bwanney Fwank (spit spit) didn't let them get in the way..


Not to worry; Dear Leader has spoken:

"We’ll make sure that contracts are simpler -– putting an end to many hidden penalties and fees in complex mortgages -– so folks know what they’re signing."

So it is spoken, so shall it be done.

AJ Oliver

The Republican party blocks regulations aimed at protecting consumers at every opportunity - and some blue-dog dems join them.


Re: "protecting consumers,"

Politicos can legislate all they want, but ultimately they can't protect citizens from their own financial and economic ignorance which is rampant in the U.S.

Caveat emptor.


How many times have you read a whole contract before signing it?


Re: "How,"

Ya think a politician is gonna save your hide?

Depends on the complexity and the potential liability.

If in doubt and depending on the dollar amt. of the transaction; spend a few bucks for an atty.

Donald Trump: Know your downside.

I lived in Chicago for 25 yrs.

One of the lessons learned: Until proven otherwise, trust no one.

The Hero Zone's picture
The Hero Zone

Economic illiteracy is quite rampant and nobody on either "side" is interested in incorporating such education into curriculum. It is also the case that regulators can regulate all they want but water will always seek its own level. The debacle over chemical plants a few pages back here is another great example.

Politicians can't save and cradle you, only you yourself can through education and the empowerment of the individual.


Too many people don't want equal opportunity... they want equal results. They don't want choice... they want certainty. Too many people don't realise that when you take a chance on what you invest in and how you do so it is just that, taking a chance... a gamble... you expect a reward if you are right. If you invest some of your earnings instead of spending and borrowing you expect a reward for doing so. Some here want to penalize those who do the smart thing and save for their future. They don't want equal opportunity they want equal results. They wish to penalize some for making smart choices. They think that laws are made that aren't fair, instead of making such taxes and regulations simpler they wish to make them more complicated and then whine when some folks find ways around them again. Make the laws and regulations simple and easy for all to understand and then they will be fair... or as much as they can ever be fair for a group containing over 320 million people. Simple is better, fewer exceptions are better than more. Parties... both parties want more laws... regulations... and exceptions, it is how they get their power, by making exceptions for their "friends/donors and demonizing the "other" party. After all the "party" is always better than the individual. Remember you must vote for the "party" not the person.