American Banker has really been doing some superb stuff lately.
Jeff Horwitz has a big scoop in today’s paper, reporting on a HUD investigation that says banks forced mortgage insurers to pay them $6 billion in kickbacks over ten years. HUD’s inspector general tied a bow on the case and presented it to Obama’s Department of Justice, which has sat on it for two years now.
It’s just the latest example of the Obama administration not going after the banks.
Here’s the gist: Most homebuyers don’t put 20 percent down and banks require them to buy mortgage insurance from third parties to cover their risk. In the 1990s, banks started requiring insurers to pay them to reinsure the loans. Reinsurance is basically insurance for insurance companies, and if a deal isn’t crooked, the reinsurer will be compensated based on the risk it takes.
But there was a major market flaw here (and an antitrust issue, if you think about it)—Banks control who gets to insure mortgages—and they took full advantage of it, naturally. If a PMI company resisted paying kickbacks—or didn’t want to pay a higher level of bribe—the bank would take its mortgages to someone who would. HUD’s IG says they gouged the PMI companies and consumers:
Documents from the investigation show that the inspector general’s staff concluded that banks and insurance companies had created elaborate financial structures that had the appearance of reinsurance but failed to transfer significant amounts of risk to their bank underwriters.
Some of the deals were designed to return a 400% profit on a bank’s investment during good years and remain profitable even in the event of a real estate collapse.
Making matters worse, banks allegedly forced unknowing consumers to buy more insurance than they needed and failed to properly disclose the reinsurance agreements, another RESPA violation.
But AB‘s excellence here isn’t just the scoop, nice as that is. Horwitz and the Banker do a very good job explaining a somewhat complicated topic. This piece could have got bogged down in the details of the arcane world of captive mortgage reinsurance, but it doesn’t. That’s no small thing.
There are a couple of other interesting points here, including this statement from Wells Fargo:
Wells Fargo said in a written statement to American Banker that risk was split equitably under its contracts with mortgage insurers. It further denied that its captive mortgage reinsurance arrangements had ever been under HUD investigation.
“It is simply not true that Wells Fargo has ever been the subject of a HUD investigation involving either our captive reinsurance programs or our relationships with any private mortgage insurance company,” the statement says.
The Banker nicely places these graphs directly after a quote from the HUD investigation of Wells.
It also reports that HUD found that “Nearly all loan files reviewed show borrowers with excessive coverage placed on their loan.” Banks gouged consumers on mortgage insurance because they were getting a taste. Actually, a 40 percent cut with 10 percent of the risk is more than a “taste.” “Half” would be more like it.
At some point when you sit on a slam-dunk case like this long enough, it starts smelling pretty bad, particularly when your administration has bailed out and protected them at almost every turn, and you’ve recently been exposed pressuring other law-enforcement agencies to ease up on the banks.
So what else don’t we know about?
Terrific work by the Banker. And part two is coming tomorrow.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.