WASHINGTON (AP) — The government is considering suing banks and other mortgage servicers over alleged insurance kickbacks that may have cost government-controlled mortgage companies Fannie Mae and Freddie Mac hundreds of millions, according to an internal federal report.
The agency responsible for guarding the mortgage giants' finances told its inspector general's office that it will decide over the next year whether to sue.
Fannie Mae and Freddie Mac, which have been under the agency's conservatorship since 2008, lost an estimated $168 million from the fees in 2012 alone, according to the report.
The Federal Housing Finance Agency did not accept that figure. But the agency said in response to the report that it "does not object" to the recommendation that it consider suing.
The FHFA barred banks and other mortgage servicers from collecting payments from insurers on June 1. But the agency does not normally discuss prospective litigation and has not previously indicated that it might consider suing over past misbehavior.
Should the agency decide to sue, the cases could reopen a controversy over how the biggest banks profited from what is known as "force-placed insurance."
This high-cost version of property insurance protects the homes of uninsured borrowers. Banks typically buy it when a borrower falls behind on mortgage and insurance payments.
After the 2008 housing bust, force-placed insurance ballooned into a $1 billion-a-year industry.
According to a 2012 investigation by New York's Department of Financial Services and private lawsuits, large banks and insurers colluded to inflate the price of force-placed insurance and split the profits.
Insurers paid banks for referring business. Struggling homeowners and mortgage investors such as Fannie Mae and Freddie Mac bore the cost in the form of higher insurance premiums, often many times the price of normal homeowners insurance.
Because insurance kickbacks are illegal, major banks and insurers allegedly contrived to mask the payments as legitimate business transactions.
The FHFA inspector general's report did not name specific institutions. But some banks, including JPMorgan Chase, Wells Fargo and Citigroup, set up insurance agencies to accept supposed commissions from the two dominant force-placed insurers, Assurant and QBE.