A "sold" sign is posted in front of a home in San Anselmo, Calif.… (Justin Sullivan / Getty…)
WASHINGTON — Federal regulators are conducting an extensive investigation into an alleged mortgage insurance kickback scheme that pushed up costs for home buyers dating from the mid-1990s.
The Consumer Financial Protection Bureau, in disclosing its first action Thursday, said the investigation revolves around a scheme in which banks and other lenders required private mortgage insurers to seek backup insurance from lender-owned reinsurance companies.
The backup insurance essentially was worthless and amounted to an improper payment to the lender by the mortgage insurer to acquire new customers, consumer bureau officials said.
Such a scheme was made possible, they said, by the general lenders' requirement that buyers with less than a 20% down payment take out private mortgage insurance to cover the additional risk of the loan.
The consumer bureau said Thursday that 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 pay a total of $15.4 million in fines for actions that accelerated during the housing boom.
The bureau said, though, that its investigation into banks and other mortgage lenders is ongoing and could produce more substantial results.
The agency has been investigating the practice for more than a year, after an earlier federal inquiry resulted in no action. In 2011, American Banker magazine reported that many of the nation's largest banks had received more than $6 billion in kickbacks through the scheme over the course of a decade.
"The mortgage insurance business can be lucrative, and our investigation indicates that lenders sought to leverage their control over the business to capture some of those revenues for themselves," Richard Cordray, the consumer bureau's director, said Thursday.
"Based on our investigation, we believe that the exertion of this pressure led these mortgage insurance companies to funnel many millions of dollars to lenders for well over a decade," he said. "In essence … the lenders were extracting financial kickbacks from the mortgage insurers in exchange for referring business to them."
The fines hit some of the largest companies providing private mortgage insurance to homeowners.
Genworth U.S. Mortgage Insurance and United Guaranty Corp. each agreed to pay $4.5 million in penalties. Radian Guaranty Inc. agreed to pay $3.75 million and MGIC agreed to pay $2.65 million.
The companies, which did not admit any guilt, said they believed that the reinsurance arrangements were proper and did not hike costs for home buyers. But all the firms said they settled to put the matter behind them.
In the typical case of a buyer putting less than 20% down, the lender usually selects the mortgage insurance company. Starting in the mid-1990s, a system was developed to allow for illegal kickbacks to lenders for lucrative business referrals, consumer bureau officials said.
Lenders set up so-called captive reinsurance arrangements — subsidiaries that provided secondary coverage — and steered mortgage insurers to their units for reinsurance, which spreads the risk of possible loan losses.
But insurers paid much more for reinsurance than the coverage was worth, the bureau said, turning the overpayments essentially into kickbacks to the lender.
The reinsurance "was essentially worthless but was designed to make a profit for the lenders," the bureau said.
The result probably was inflated costs for consumers, although Kent Markus, the bureau's assistant director for enforcement, would not estimate how much extra money homeowners paid. He also would not name the lenders that are under investigation.
In January, homeowners in Pennsylvania, North Carolina and Maryland filed suit against the U.S. unit of HSBC Holdings, alleging that the British banking giant took kickbacks from private mortgage insurers.
The mortgage insurance companies were at fault even if they had to pay the kickbacks to lenders to secure business, Markus said.
"In every kickback situation, there's somebody paying and there's somebody receiving. It takes two to tango," Markus said.
"Today we're dealing with those who paid the kickbacks and, in particular, trying to make sure the practice is stopped and consumers don't continue to be victimized in this way," he said, "but we have more work to do in this matter."
As part of the consent orders, which await court approval, the companies would be prevented from engaging in the practice and prohibited from entering into any new reinsurance arrangements with affiliates of lenders for 10 years.
"We are pleased to put this matter behind us and believe that this settlement is in the best interests of the company and its customers," MGIC said.
Radian President Teresa Bryce Bazemore said her company believed that its reinsurance arrangements complied with federal law and "caused no harm to consumers" but agreed to the settlement "to eliminate distractions at an acceptable cost."
Rohit Gupta, chief executive of Genworth U.S. Mortgage Insurance, said that the firm followed guidance on captive reinsurance from the Department of Housing and Urban Development and that "consumers paid the same amount for the underlying insurance whether or not their loan was part of a captive reinsurance arrangement."
HUD launched the investigation in 2008. The consumer bureau, created in 2010, took over responsibility for policing the law governing real estate purchases.