The practice of banks forcing expensive homeowners insurance on borrowers could come to an end after Fannie Mae told lenders it would seek to oversee such policies itself.

For many homeowners who are required to buy insurance as a condition of getting or keeping a mortgage, there is no choice as to insurer, terms or price. They end up with force-placed insurance, controversial policies that are purchased by the bank or mortgage servicer on the homeowners' behalf.

Government-controlled Fannie Mae, the biggest source of money for U.S. home loans, notified lenders of the planned policy change in a Tuesday bulletin, a copy of which was obtained by Reuters.

Fannie Mae will soon implement changes to its Lender-Placed Insurance (LPI) requirements to significantly reduce costs to homeowners, taxpayers, and Fannie Mae, it said, adding that it has issued a request for proposals to insurance companies to compete for the business.

The (proposal) is structured to ensure that insurance costs are significantly reduced, Fannie said. Fannie Mae also said it would issue guidelines to mortgage servicers on when and how to obtain what are often called force-placed policies, and on what costs would be reimbursable.

In many cases, existing force-placed insurance policies are sold by insurance companies owned by the lenders, or by insurers with which the lenders have a financial relationship. Prices are usually substantially higher than they would be normally.

Our goal is to reduce costs for Fannie Mae and thereby taxpayers, and to reduce a barrier for homeowners becoming current on their loans, said Andrew Wilson, a spokesman for Fannie Mae.

New York financial regulators have been investigating the practice, issuing subpoenas in January to roughly two dozen insurers and mortgage servicers.

New York's Department of Financial Services said it would continue its probe, even with Fannie's move.

Force placed insurance has been and will continue to be one of our top initiatives, the department's superintendent, Ben Lawsky, said in a statement.

American Banker first reported the details of the Fannie bulletin.

(Reporting By Ben Berkowitz in Boston; Additional reporting by Karen Freifeld in New York and Margaret Chadbourn in Washington; Editing by Mark Porter and Steve Orlofsky)

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