The Federal Housing Finance Agency is giving private mortgage insurers some hope this holiday season that they might get a chance to offer deeper mortgage insurance on Fannie Mae and Freddie Mac single-family loans.
The agency plans to conduct an analysis and assessment of "front-end" credit risk transactions and issue a request for input next year, according to a release last week that spells out the FHFA's goals for the coming year.
The private mortgage insurers have been urging FHFA to move in this direction, but the agency has stopped short of proposing a pilot program. That may mean it's another year or two before the mortgage insurers get approval from the FHFA.
"We look forward to responding to the request for input and encourage FHFA to proceed in order to take advantage of expanded front-end risk sharing, particularly with private mortgage insurance, to more fully protect taxpayers from exposure to housing related losses," said Lindsey Johnson, president and executive director of U.S. Mortgage Insurers, in a statement.
The mortgage insurers want to provide deeper loss coverage on pools of single-family loans guaranteed by the two government-sponsored enterprises. They currently insure 20% to 35% of losses on individual GSE loans. If FHFA approves deeper mortgage insurance as part of its credit risk transfer policies, the insurers might be able to insure up to 50% of the loan balance.
Over the past two and half years, the GSEs have completed single-family risk-sharing deals involving loans with a total unpaid principal balance of $667.5 billion. The vast majority of these deals ($506.5 billion) are known as "back-end" deals. Investors, such as hedge funds, bid on the expected performance of GSE mortgage-backed securities and cover a small share of the losses.
"The GSEs are meeting their risk-sharing targets for 2015 with their back-end structures," said Amy Debone, a policy analyst at Compass Point. "But the actual loss protection is only 3-4% at most. So there is a lot of UPB [unpaid principal balance] involved, but the actual risk that is transferred in back-end deals is very small."
USMI's Johnson noted that policymakers are working toward "de-risking" the GSEs and front-end risk sharing should be part of the solution.
"After three years of largely back-end risk sharing transactions, the time is right to move forward with a more balanced approach," he said.