Friday Force Placed Insurance Hearings, Day 2:
Late Start 7:17
DFS - Ben Lawsky, Joy Feigenbaum, Daniel Walter
Great summary of yesterday’s events from Ben.
Everyone swears in.
Chase Insurance Agency: All mortgage agreements need hazards; fire, wind, flood. Protects collateral. A small percentage do not (no percentage given). They will perform the service of buying LPI. 2 Calls to the voluntary carrier, notify homeowner to avoid LPI.
Chase is adding 5 to these 8. They’re also blah blah blah…(I don’t like this guy already)
1.3% of Chase borrowers.
Escrow – 70% of 1st lien
90% Chase pays premiums through Escrow
Escrow/Non are treated the same
Sole Provider – Assurant with prices relative to peers (of which there are none, except Balboa)
Port of share arrangement.
¾ of LPI premiums for ¾ of written loss
10% commission on net flood, 4% wind
We comply with state and federal law (i.e we require what we’re required to require)
Select Portfolio Servicing – (Was once a Balboa client. Only recently switched to Assurant)
Rare instances borrowers fail. Borrowers fail. Select advances 2 Retail policies for every 1 force placed (at’s 33% of Borrowers with escrow accounts that failed).
It’s not in default because we don’t tell credit agencies.
Many years after the fact. There’s no statue of limitations on a retail policy (although in the Fidelity Information Systems/Lender Processing Services system, anyone can tell you Tracksource rules won’t automatically cancel more than the current term. Only an operator can touch these accounts. At this time, Balboa/Assurant makes the decision for Select Portfolio Services)
DFS: why are you paying a premium where a portion of that premium (50%) to the bank?
Chase: Someone’s gotta do it. We just kept what we had because if someone’s gonna take that risk, what position are they going to be in to do that. I can see how someone would think that. People in Chase are very focused. Most servicers do, we’re above and beyond them.
We are telling on your statement, we’re thinking about putting it on Chase.com 12-24 months, it’s more dominate now.
DFS: why 75%?
Chase: Somebody’s gotta do it, who’s in a position to? (ummm…every insurance company in the world…everywhere).
DFS: Reinsurance by Bank One?
DFS: Bank One is Vermont captive insurer
Bank One: it’s regulated by Vermont regulators. We’re undergoing an exam. They want detailed annual filings 5PWC, reserve adequacy $340 million in capital surplus, more than sufficient to fund a catastrophic
We began through Lloyd. In 2006, it wasn’t a separate line of business (with insurance services for our line of business).
DFS: Do you have sufficient knowledge of Vermont laws to understand why it was chosen?
DFS: Why does SPS want to be in the circle.
SPS: Not originating new loans ourselves and get new business (meaning, they buy these “select portfolios” that they choose to service. They buy shitty loans on purpose).
We have to maintain our reputation in order to attract new business (banks with struggling borrowers.)
DFS: The perception is when the purchaser, SPS, is also on the other side, taking 50% of premiums paid, the competition for low pricing is reverted.
SPS: In every case we have an opportunity to maintain their coverage, we do. Approximately 2 to 1 we paid it through their escrow (which is 50% of their portfolio so half of you have 2 to 1 odds of having force placed insurance just by being in a Portfolio that is Selected for Servicing)
DFS: Do you price shop for lower rates? Would you agree to a 50% coshare meaning you’re getting half the profits that impacts your price shopping?
SPS: We don’t participate in the rate setting process. I don’t dispute the fact that there’s limited number of parties. Without being party, there’s a limit of providers. (no there’s not…not for Insurance, which is force placed…only for “Force Placed” Insurance.
I’m not a business expert.
Chase: We talked to the oldest and biggest insurance companies you’ve ever heard of, but I don’t know who any of them are. (he struggles with microphone).
What we said is. We approach these voluntary companies, we’re gonna send you anyone in the beginning stages. Just get them a voluntary policy. Leads with no cost, no revenue, no rate reduction. We have done things. We found an Aggregator that is going to be able to work with us. We have nothing right now, but umm…we’re like trying really hard, we totally swear.
Chase is the only one thinking about doing that. We can do it by the 4th of July. We’ve been on this for 6 months. Last year, late in the 3rd quarter. We reached out to all of them, they wouldn’t return our calls.
Chase doesn’t want compensation. We’re doing it for the borrower to provide a solution.
2004/2005 – Chase losses were over 50%. Since then, I’ll values have increased 8 fold. Default rates, elongated foreclosure process. Premium growth can’t be predicted. Our placement rates have doubled.
DFS: You play no part in the rate making process. Clarify?
Chase: Ask the Insurance Carrier
DFS: I’m talking about a rule against charging less than Cap Rate.
Chase: They have to go with what’s approved including arbitrary being justified along with rate discrimination
DFS: That’s a different question. I’m saying the same product. I would be surprised to know an insurer in NY with a Cap couldn’t enter the market.
Chase: Assurant! Assurant! Assurant! We recognize the Loss Ratios
DFS: An approved rate is between an insurance company and a lender. It’s acceptable to charge X by Assurant as a rate to the lender Chase. Now the Lender Chase has to figure out what is being charged for the force placed policy on the homeowner. Correct?
What percentage is Chase?
DFS: You’re a pretty big customer, have you talked to any insurers and used your clout?
Chase: Um. We asked for rates. They came back and said they were actuarily justified on a quarterly basis. Assurant Assurant Assurant
We didn’t price shop.
DFS: you’re not simply the Servicer, but you’re taking 75% of the risk. It’s a significant consideration.
Chase: Assurant Assurant Assurant. We don’t know anything about Insurance, because we contract all insurance matters (as stated yesterday by Assurant) are handled by the Force Placed Insurer. Your Voluntary Carriers like USAA, Farmers, Allstate, State Farm, etc, didn’t want to do the mortgage servicer’s job. They know better. It’s wrong. Assurant and QBE will do it though.
DFS: Incentives to pay claims? They collide.
Chase: kind of I understand the question but I uh I uh I you know I uh don’t see that as an incentive for the servicer or the insurance carrier or the reinsurance carrier.
DFS: But let’s assume they’re a profit making company, don’t they get paid more?
Chase: Rates drive loss ratios and catastrophic event. Assurant has their own claims adjusters. They utilize independent agency adjusters. I had boots on the ground for the CAT management team in Katrina and seen how they respond to the borrower who we don’t want to get full settlement under the T&C of the policy.
DFS: When you advance the funds, what efforts do you undertake? (None. Assurant does that)
Chase: I don’t know Operations. We outsource that to Assurant.
I think the answer is they go through all the contact stuff, 60 days later you get a policy, before that you get a binder then a new policy. You will know you have insurance and you will know who to contact in the event of a claim.
DFS: What’s the percentage of claims paid as the number of claims made?
Chase: I do not (again…all run by Assurant)
DFS: One more question if I might. You ceased accepting commissions since we started looking. How did it relate to Fannie Mae’s guides?
If you tell us what to do, we’ll do it.
If a carrier can’t pay claims, they won’t write business, for example, in Florida.
DFS: The last 5 years Loss Ratios in NY 11.52-21.29% over the last 5 years, provided by Chase’s counsel.
Also 17.42%, and you also get your share of Catastrophic coverage.
Why can’t you tell Assurant if that’s your concern?
Chase: We rely on Assurant. Assurant. Assurant. Tell us what to do and we’ll do it.
DFS: 12 year low loss ratios
Chase: We rely on insurance. They look at 20 year events and bigger.
DFS: in 20 years you’re profiting off suffering. Hundreds and thousands of people.
Chase: Let’s file rates with New York and move on
SPS: We’re getting too much credit. Some of those loss rates aren’t mature. There won’t be any change between what’s actually occurred.
DFS: For 3 storm years, your analysis including expected losses were gone. No future claims for 2006, 7, and 8.
SPS: I don’t know about 3 year projection. I did a projection. I was thinking 3 won’t change.
DFS: That’s my point. You were dead on for those 3 years.
SPS: We don’t forcast any losses. It matches actual.
DFS: That’s good. I’m beating on your horse, but why no business discussion with Assurant to bring those numbers far more in line? Is that regular? Is that a part of your business?
SPS: Not to this point
DFS: One might say the reason is a conflict of interest.
SPS: We can make one mistake 365 days a year, and it can ruin our reputation and dry up any business. We’re energized to do what’s right the right way?
DFS: Don’t you have a stake in both sides?
SPS: I understand the question and the perception, but it’s a much larger benefit to us to have the strong reputation and keep borrowers, investors, and regulators happy.
Perhaps on regulatory, I couldn’t answer. Keeping the borrower happy and balancing it with investor needs.
DFS: Speaking of investors, you advance premium. At the end when it liquidates, you get those advances back. You specialize in distressed properties. A good portion of your portfolio will be liquidated
You made note of the fact you advance these funds and wait, most often when it’s liquidated. During that period of time is you don’t charge interest. So force placed is an expensive proposition. The ROI on the advance has got to be pretty low. So in order to offset that diminished ROI, are you taking into account the quota share returns you’re getting as a function with your agreement with Assurant.
You’re losing money on Force Placed. It can take 18 months. You’re not charging interest. At the end of the day you’re lucky to get the money. You’ve gone a long time putting money in with no return. What makes up for that blaring loss? In your ROI do you consider you get a 50% quota share and making a lot of money in premiums?
SPS: 2 ways to answer the servicers advance funds in a variety of situations, including LPI. Our pricing model takes LPI contributions into consideration.
There’s a variety of revenue streams. Top of my head last year, this product contributed 14% of revenue.
DFS: December 2010 you stopped commissions
SPS: December 2011
DFS: but at the same time you increased your quota share almost dollar for dollar. Why?
SPS: We challenged P&P’s and looked for Best Practices to be at the forefront, so we did away with commission and increased quota share.
DFS: So they’re equal
SPS: for more risk
DFS: did you lose money?
SPS: Not to date, no.
DFS: what about the other 3 states including New York?
Do you know if you’ve made more money to date than you were making with the commission arrangement?
SPS: I don’t
DFS Please follow up. And in leading best practices. What about commissions at that time was being undermined as a best practice. It’s a cost of doing business. Why were these things changing?
SPS: I don’t know what I’d offer except energy like this. The market is questioning it, so now we are (again, doing what we’re required to do…as a BEST practice)
DFS: Back to Chase, what do you 2 idiots do?
Chase: Vice President of 2 companies. Buncha letters. This is the first time they manage to answer without blaming Assurant ;)
DFS: How much has Chase earned nationally over the last 5 years based on quota share and commissions?
Chase: Last year $200 million, numbers going up because of default rates. There’s 2 significant dynamics.
DFS: If you’ll accept my math $660 million made by profiteering?
DFS: How do you book that? When cost is incurred or when it’s paid?
Chase: The premiums and losses on a monthly basis disbursement.
DFS: So this is actual cash that’s come back?
DFS: And you had the potential to produce even higher profits but didn’t go that route, was that quota share?
Chase: Yes at 90% to Balboa.
DFS: Thank You (Thank You again, Joy :D)
What services are provided?
Chase: Monitor KPI for Placement
Negotiate Pricing (outsourcing)
Safeco, blah blah
DFS: So you paid Assurant to retain themselves
Chase: Blah blah blah
It’s standard. There was no negotiation. Nobody did any kind of what type of time was being used for this.
DFS: How many employees do you have?
Chase: 206 intimately involved.
DFS: How many are devoted to the services you spoke about?
DFS: Because terms were negotiated in advance, did you provide minimal services for commissions received.
Chase: It was permitted by law.
DFS: But you didn’t provide what (Farmers, Geico, etc) do. How many people work at Bank One.
Chase: I can’t speak to other lines of business. But roughly 8 employees and 4 directors for Bank One.
I couldn’t say.
DFS: Did Chase own Assurant?
Chase: I dunno. Until 2007? I can’t address. We own less than 1% and less than 5% for our customers.
DFS: Did they at one point own 9%
DFS: It’s public record. We’ll get it. 70% of the mortgages you service are for Escrows and on 97% they advance funds? Have these always been the statistics. Since when?
Chase: My guess is that over the last 3 years it’s pretty stable. I think those are cancels for underwriting reasons.
DFS: What about non escrow? What percentage is coming from the 3%
Chase: I don’t know
DFS: The new July 4th insert will be included with the mortgage statement?
Chase: Yes with shiny colors.
DFS: Claims. What does Chase do to inspect properties?
Chase: We review data. We don’t personally inspect an REO. We audit their claims practices for Assurant, and in 2005 I went out with field adjusters (working for who? You don’t do that)
DFS: I was directing toward vacant homes that have not been liquidated so there’s no inspection?
Chase: I believe if we know it’s delinquent, I can’t speak to it with certainty, but I believe there are property inspections that do take place by our request to a property management company.
DFS: We’d like more details on that later. You referred in written testimony to a number of agreements that Chase is not a party, but you did note Chase is in compliance with Goldman Sachs, etc regarding LPI.
Reasonably priced policies.
Chase: How does the OCC define reasonable price. Clearly for us, there’s few carriers, and Assurant was at or below other Insurance companies provide, so we call that reasonably priced.
DFS: but the Loss Ratios of 11%-21% I take issue with being compliant
DFS: We’re finishing early. Thank you. I know it’s not easy. We take seriously your desire to want to be leaders respectively in the industry and I look forward to working with you.
Last thing, we’re gonna put your full testimony on the record, and we’ll be convening again in an hour.
**End of Chase Interrogation…this is starting to get better and better with every passing moment.***