Fannie Mae Insurance Plan Draws Fire

WASHINGTON — A controversial life and disability insurance marketing plan by the nation’s largest source of home mortgage money--Fannie Mae--has run into new trouble with congressional and regulatory overseers.

Under development for the last year, Fannie Mae’s mortgage protection plan would provide certain first-time home borrowers with insurance coverage to pay off the loan in the event of the borrower’s death or help pay the monthly mortgage in the event of disability or extended unemployment.

Critics in Congress and the life insurance industry say Fannie Mae’s program would represent an unfair intrusion by a government-backed for-profit agency into a heretofore private, highly competitive segment of the insurance field.

House Banking Committee Chairman Rep. James A. Leach (R-Iowa) has been especially critical of the program, saying the agency is “precariously close to entering the life insurance business,” a far stretch from its original home finance charter.

Now Fannie Mae’s principal federal government regulator, the Department of Housing and Urban Development, has demanded details about the insurance concept, including explanations of why it’s needed to promote homeownership and how much profit Fannie Mae expects to reap from it.

At the same time, the Office of Federal Housing Enterprise Oversight, another regulator, confirmed that it is studying how Fannie Mae’s entry into mortgage credit insurance could affect its financial safety and soundness.

Although Fannie Mae is a New York Stock Exchange-traded corporation, it has a sizable line of credit at the Treasury Department and for that reason is able to borrow money at interest rates significantly below that of purely private competitors.

Fannie Mae’s troubles with the mortgage protection program have arisen in part from its unwillingness to provide even basic details about it to the public.

Initial information about the plan came only last February, after an internal outline was obtained by this reporter (Real Estate, Feb. 9). The outline, verified as authentic by Fannie Mae, pictured a hugely profitable life insurance program whereby Fannie Mae would borrow money at low rates, buy insurance coverage for borrowers, deduct premium payments against its corporate income taxes to further lower its effective cost of capital and receive annual payments from participating insurers.

The outline projected net after-tax income to the company of nearly $600 million a year by the 20th year of the program. By the 30th year, the program would add nearly $1 billion a year to Fannie Mae’s bottom line.

In a more recent two-page summary of the plan sent to Leach in April, Fannie Mae described a modified insurance program that would be limited to first-time purchasers. Other provisions:

* It would pay “all or part” of the monthly mortgage payment “for several months” during the first five years of the loan, in the event of disability or unemployment.

* It would pay off the mortgage balance--that is, pay off Fannie Mae--in the event of the borrower’s death.

* It would provide this coverage “free.” For first-time borrowers who asked to participate, Fannie Mae would pay the insurance premiums. The only cost to the borrower would come in the form of “imputed income” for federal tax purposes, because Fannie Mae would in effect be providing a gift to the taxpayer.

Additional details about the plan were provided by Fannie Mae president Lawrence M. Small in a May 7 letter to the American Council of Life Insurance, a Washington-based trade group.

Small said Fannie Mae now plans to limit insurance coverage to “less than about 1% of total mortgage originations” in any year. He also said that “under current plans,” Fannie Mae would offer the program for “only 2, 3 years.”

Although Small’s letter sought to smooth the feathers of insurance industry critics, at least one board member of the council said he remains “absolutely opposed to any entry by a federally subsidized agency” into competition with private companies.

Hayne Hipp, president of Liberty Corp., a major South Carolina-based insurer, said in an interview that his firm “could offer ‘free’ insurance, too, if we could borrow money at the rates Fannie [Mae] can.” He said it is unfair to companies in the private sector to be forced to go head-to-head with a huge government-backed enterprise like Fannie Mae.

Fannie Mae’s rationale for its program--to help first-time buyers--”is not even credible,” added Hipp, whose firm offers mortgage-related life insurance products.

“In all the years we’ve been in business, we’ve never heard anyone say, ‘Gee, I’m afraid to buy my first house because I’m afraid I’m going to die,’ ” Hipp said.

Asked for comment on recent developments regarding the insurance plan, Fannie Mae spokesman David Jeffers would only say that the company expects to “make appropriate responses” to regulators and others “at the appropriate time.”

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Distributed by the Washington Post Writers Group.