Banks and other mortgage servicers that might be subject to such lawsuits did not immediately respond to phone calls and email messages seeking comment on the threat of litigation.
Though the FHFA barred banks and other mortgage servicers from collecting payments from insurers on June 1, the agency does not normally discuss prospective litigation and has not previously indicated that it might consider suing over past misbehavior.
Should the FHFA decide in favor of such litigation, the lawsuits could reopen a controversy over how the country's biggest banks profited from what is known as "force-placed insurance," a high-cost version of property insurance that protects the homes of uninsured borrowers. Typically purchased by banks when a borrower falls behind on mortgage and insurance payments, force-placed insurance ballooned into a $1 billion-a-year industry after the 2008 housing bust.
According to a 2012 investigation by New York's Department of Financial Services and a slew of private lawsuits, large banks and insurers colluded to inflate the price of force-placed insurance, splitting the profits. Insurers paid banks for referring business. Struggling homeowners and mortgage investors like Fannie Mae and Freddie Mac bore the cost in the form of higher insurance premiums, often many times the price of normal homeowners insurance.
Since 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. But as New York and private plaintiff's attorneys separately uncovered, these bank-owned insurance agencies were little more than empty shells. In one example, JPMorgan's own employees stated in court documents that a bank-owned insurance agency did not employ a single insurance agent. In other instances, insurers rewarded banks through generous reinsurance deals or simple, lump-sum multimillion-dollar payments, New York state found.
In the wake of the New York investigation, other state probes and private lawsuits, many of the country's largest mortgage servicers — including JPMorgan, Wells Fargo and Citigroup — renounced commissions in 2012 and 2013.
The FHFA's prospective lawsuits against banks and insurers would not be automatic victories, its inspector general said. But similar class-action lawsuits brought by private attorneys representing homeowners have been successful, indicating the government would be in a strong position if it were to sue. Over the past three years, mortgage servicers and their force-placed insurers have paid out $674 million to settle such cases — preventing a single one from reaching trial. In September of 2013, JPMorgan and Assurant reached the biggest single settlement, a $300 million payout.
According to New York's Department of Financial Services, JPMorgan Chase took in more than $600 million from force-placed reinsurance deals since 2006.