US regulators probe mortgage insurance kickbacks

A mortgage insurance  kickback scheme, that increased costs for home buyers dating from the mid-1990s is under extensive investigation by US federal regulators.

According to the Consumer Financial Protection Bureau (CFPB), which disclosed its first action on Thursday, the investigation concerned a scheme in which banks and other lenders required private mortgage insurers to seek backup insurance from lender-owned reinsurance companies.

The backup insurance, which was essentially worthless amounted to an improper payment to the lender by the mortgage insurer to acquire new customers, according to consumer bureau officials.

A scheme of the kind was possible, they said due to the requirement of the general lenders that buyers with less than a 20-per cent down payment take out private mortgage insurance to cover the additional risk of the loan.

According to the consumer bureau, it had settled accusations against four major private insurers, including giant MGIC Investment Corp, that they improperly kicked back money to lenders that steered home buyer business to them. The four insurers agreed to make a total payment of $15.4 million in fines for actions that accelerated during the housing boom.

According to the bureau, its investigation into banks and other mortgage lenders was continuing and more substantial results may be expected.

The practice has been under investigation by the agency for over a year, following an earlier federal inquiry resulting in no action. In 2011, American Banker magazine reported many of the US's largest banks had raked in $6 billion in kickbacks through the scheme over the course of a decade.

According to CFPB director Richard Cordray, illegal kickbacks distorted markets and could inflate the financial burden of homeownership for consumers.

Lenders typically required homebuyers who could not afford a 20-per cent downpayment on a house to buy mortgage insurance to offset the risk of default. The mortgage insurance company was selected by the lenders not the consumer.

Those mortgage insurers often purchased their own insurance, known as ''reinsurance,'' to cover the risk of high losses on the mortgage.

At its peak in 2007, over 15 per cent of loan originations had private mortgage insurance, data from the Department of Housing and Urban Development showed.

According to the CFPB, the four mortgage insurance firms involved in the settlement bought reinsurance from subsidiaries of the lenders.

Government officials became suspicious due to the firms' reinsurance payments to the subsidiaries being much greater than the reinsurance that was provided, which led them to believe that the mortgage insurers were also paying the lenders to steer business their way.

According to Cordray, the mortgage insurance business could be lucrative and its investigation indicated that lenders sought to leverage their control over the business to capture some of those revenues for themselves.