The Federal Housing Finance Agency (FHFA) recently announced changes to mortgage insurance (MI) master policy requirements. The FHFA has worked with the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to revise the MI master policy requirements with the stated goals of ensuring consistent and reliable MI coverage, and supporting efforts to achieve clarity of coverage, greater operational efficiency, and transparency in the mortgage market.
Specifically, the new MI master policies are supposed to improve or clarify the various rights and obligations of mortgage lenders and/or servicers relating to certain commonly disputed issues between lenders and/or servicers and their mortgage insurers, including loss mitigation, claims processing and coverage exclusions. Unfortunately, these new policy forms may not provide the touted improvements or additional clarity. While many changes in the new MI master policies are common among mortgage insurers, a number of notable differences could someday dictate whether a given loan will be covered at the time of claim, or could drastically affect the cost and publicity of potential disputes that may arise. A few of the notable differences are summarized below:
- Choice of Law – which state or states’ laws govern disputes under the policy could influence coverage or the outcome of an action. Many existing master policies provide that the governing law is the location of the subject property or the location of the original insured identified on the certificate or declaration page. Certain new MI master policies, however, provide that a specific state’s law will govern all disputes under the policy regardless of where the original insured or subject property is located. There are pros and cons to having just one law versus potentially multiple governing law(s). At a minimum, lenders and/or servicers should analyze the applicable law with respect to commonly disputed mortgage insurance issues.
- Mandatory Arbitration – certain new MI master policies contain “mandatory” arbitration provisions requiring that all disputes arising out of or relating to the policy must be settled exclusively by arbitration. The arbitration may be conducted in accordance with the Commercial Rules of the American Arbitration Association (“AAA”) or by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures. The arbitration provision also may specify hearing locales, which most likely will be close to the mortgage insurer’s residence. Lenders and/or servicers should consider negotiating for arbitration at the insured’s option, as some existing master policies provide. While more private, arbitration is not necessarily cost effective. A more favorable locale also may be negotiated.
- Servicing Guides – “Servicing Guides” are referenced throughout the new MI master policies, although they are not specifically incorporated into or made a part of the policies. Nevertheless, because the policies provide that servicers are obligated to comply with the current and any subsequent published Servicing Guides, they present a moving target for servicers and may indirectly change the terms of coverage. Lenders and/or servicers should consider pushing for one authority that governs its servicing rights and obligations for all mortgage insurers, rather than attempting to comply with each mortgage insurer’s ever-changing Servicing Guides.
- Appropriate Proceedings – certain new MI master policies provide that Appropriate Proceedings must be commenced within six months of default unless the borrower is delayed by a court order or moratorium, or the insured is otherwise directed by the mortgage insurer. There is no mention of any exception to the six-month time period based on any other “applicable law,” or for actively and diligently pursuing loss mitigation or a borrower workout, as we have seen in other new MI master policies. Lenders and/or servicers should not be penalized for seeking to comply in good faith with all applicable loss mitigation requirements. Nor should coverage be cancelled based on purported delays in commencing, pursuing or completing Appropriate Proceedings, no matter how long the delay.
That there are notable differences among the new MI master policies suggests there should be room for negotiation. But lenders and/or servicers must act swiftly. Mortgage insurers intend to roll out their new MI master policies soon. Reed Smith’s Insurance Recovery Group can help evaluate and negotiate potentially problematic provisions in the new master policies before they go into effect. Our professionals have extensive experience advising and assisting large financial institutions on origination and servicing issues relating to mortgage insurance, and have successfully represented policyholders in disputes with mortgage insurers. If you have been provided with a copy of any new proposed master policies, and are interested in negotiating more favorable language or in understanding the issues raised by these new forms, please contact the authors of this Alert or the Reed Smith attorney with whom you routinely work.