Mortgage reinsurance attracts scrutiny from watchdog agency

PHH Corp. discloses RESPA investigation

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The Consumer Financial Protection Bureau is looking into whether one of the nation’s largest mortgage lenders violated the Real Estate Settlement Procedures Act by reinsuring loans for private mortgage insurers it referred business to.

PHH Corp. — whose PHH Home Loans LLC subsidiary is jointly owned by real estate franchisor Realogy Corp. — says it stopped reinsuring loans in 2009, and the company maintains that its practices up to that point complied with RESPA.

A spokeswoman for PHH said today that the investigation is ongoing and the company has no further comment, and a Realogy spokesman said that company had no comment on the Consumer Financial Protection Bureau’s investigation of PHH’s reinsurance business.

In wrapping up a multiyear investigation in 2009, the inspector general of the Department of Housing and Urban Development (HUD) estimated that beginning in the 1990s, mortgage insurers funneled $6 billion in insurance premiums to lenders for reinsuring loans. But HUD reportedly concluded that in many cases, lenders assumed little or no risk, and that consumers paid for excessive amounts of coverage.

According to a two-part series published by American Banker, HUD formally referred the case to the Department of Justice in 2010.

PHH Corp. revealed in a regulatory filing in January that the Consumer Financial Protection Bureau, which took over responsibility for enforcing RESPA last year, "had opened an investigation to determine whether (PHH’s) mortgage insurance premium ceding practices to captive reinsurers comply with (RESPA) and other laws" enforced by the bureau.

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PHH sells most of the loans it originates to Fannie Mae and Freddie Mac, both of which require that borrowers who put less than 20 percent down on a home purchase obtain private mortgage insurance.

According to American Banker, during the housing boom some lenders demanded that private mortgage insurers "cede" some of the premiums paid by borrowers to reinsurance companies owned by the lenders.

If those reinsurance companies were not taking on an amount of risk proportionate to the premiums they were receiving, those payments might be considered kickbacks under RESPA, American Banker reported.

Because lenders typically choose the private mortgage insurance provider, they would also have been violating RESPA’s anti-kickback provisions if they did not disclose to borrowers their relationships to reinsurance companies.

PHH Corp. says it provided reinsurance services in exchange for premiums ceded, "and believes that it has complied with (RESPA) and other laws."

In its annual report to investors, PHH said it paid $65 million in reinsurance claims during 2011, and that the company’s maximum exposure to reinsured mortgage loans originated from 2003 through 2009 was $430 million. Actuarial estimates suggest the total losses will be closer to $130 million, the company said.

Realogy joint venture

PHH Corp.’s subsidiary, PHH Mortgage Corp., originated nearly $52 billion in loans in 2011, making it the fourth-largest retail mortgage loan originator in the U.S., according to statistics compiled by Inside Mortgage Finance.

From 1997 through 2005, PHH was a wholly owned subsidiary of Cendant Corp., the former parent company of real estate franchisor Realogy.

PHH became an independent, publicly traded company in February 2005. Cendant became Avis Budget Group after spinning off Realogy, Wyndham Worldwide Corp. and Travelport Inc. in July and August 2006.

Since 2005, Realogy and PHH have operated a joint venture, PHH Home Loans LLC, with Realogy owning a 49.9 percent noncontrolling interest and PHH acting as the managing partner.

Under the terms of a 50-year agreement signed in 2005, PHH Home Loans is the exclusive recommended provider of mortgages for Realogy’s company-owned real estate brokerages, and is the only provider of mortgages Realogy endorses for customers of its independently owned franchisees.

In 2011, PHH said about 22 percent of its mortgage loan originations were derived from the company’s relationship with Realogy and its affiliates. PHH has the exclusive right to use the Century 21, Coldwell Banker and ERA brand names in marketing its mortgage loan products through PHH Home Loans

Realogy receives a fee from PHH for licensing its brands and an advertising fee for allowing PHH promotional opportunities on websites and in offices and at periodic group events. In its annual report to investors, Realogy said its relationship with PHH contributed $50 million to the company’s bottom line in 2011, including equity earnings of $24 million, cash dividends of $20 million, and $6 million in fees.

PHH posted a $127 million net loss in 2011 as revenue fell 9 percent, to $2.2 billion. Although mortgage lending generated $258 million in profits for the company, PHH Corp.’s mortgage servicing division racked up $557 million in losses.

In January, PHH announced that chief operating officer Glen Messina was replacing Jerome Selitto as CEO. Tuesday, the company announced the resignation of President Luke Hayden and Vice President and Treasurer Mark Johnson.


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