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Private mortgage insurers see deeper coverage of GSE loans as a way to expand business, while lenders hope it could lead to a reduction to guarantee fees.
June 12 -
More lenient capital requirements than expected from Fannie Mae and Freddie Mac were good news for two legacy private mortgage insurers, but another is facing a bigger deficit than initially thought.
May 11
WASHINGTON — Private mortgage insurers are seeking a larger share of the credit risk on Fannie Mae and Freddie Mac-guaranteed loans.
The trade group U.S. Mortgage Insurers released a study Monday that shows deeper mortgage insurance coverage could significantly reduce the loss exposure of Fannie and Freddie caused by defaults or foreclosures while also reducing costs for homebuyers.
Currently, mortgage insurers like Radian Guaranty and Genworth Financial can provide maximum first-loss coverage down to 63% of a mortgage's loan-to-value ratio. On a $100,000 home purchase loan where the borrower made a 3% down payment, the value of the home would have to drop below $63,000 before the GSEs would experience a loss.
Under the trade group's proposal, mortgage insurers could increase maximum coverage to 50% so the house price would have to fall below $50,000 before Fannie and Freddie would experience a loss.
"Promotion of greater front-end risk sharing with mortgage insurance is a way to help build a stronger and more sustainable housing system," said Rohit Gupta, president and chief executive of Genworth Financial in a statement. During a conference call on Monday, he said mortgage insurers are talking to FHFA officials about their plan.
Radian Guaranty President Teresa Bryce Bazemore said the proposal would allow the GSEs to lower their guarantee fees, which would reduce borrower's costs.
"It is also a good time for the MIs to engage in these discussions since we have now built financial strength," Bazemore said Monday.
The Federal Housing Finance Agency issued mortgage insurer capital standards earlier this spring and they go into effect Dec. 31. Insurers have to meet all the new requirements by February 2016 to certify compliance.
"FHFA remains committed to exploring additional ways that Fannie Mae and Freddie Mac can share credit risk with the private sector and we are reviewing the analysis prepared for USMI on providing deeper mortgage insurance coverage," an FHFA spokesperson said.
At the Mortgage Bankers Association annual convention, FHFA Director Mel Watt did not mention mortgage insurance in his prepared remarks regarding credit risk. But he emphasized the success of the GSEs' risk transfer transactions, where credit risk is auctioned off to private investors.
"Since 2013, the enterprises have transferred a significant portion of credit risk on single-family mortgages with an unpaid principal balance exceeding $700 billion," Watt said. He stressed the FHFA will continue to work with the GSEs on the other innovative risk transfer transactions, "such as credit-linked notes." Credit-linked notes allow a securities issuer to transfer a specific credit risk to investors.
"FHFA and both enterprises are committed to building on recent progress and we view credit risk transfers as a key part of Fannie Mae and Freddie Mac's credit guarantee business going forward," Watt said.
