Mortgage insurance companies are getting a long-awaited shot at expanding their business with Fannie Mae and Freddie Mac. But it's shaping up to be less lucrative than they had hoped.
Freddie Mac on Monday plans to say it will start a pilot program to increase the amount of risk it shares with private mortgage insurers. The program will apply to loans meeting certain criteria and acquired by the mortgage giant from Sept. 1 through Feb. 28. Freddie Mac estimates it will transfer more than $100 million of backing to the private insurers, on almost $4 billion of loans.
That's less than some insurers had been seeking. Over the past year, industry executives have lobbied the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, along with lawmakers to become more prominent players in the companies' efforts to transfer mortgage-credit risk to the private market. The insurers may also balk at the deals' structures, which require them to post extra collateral and give Freddie Mac and Fannie Mae the power to decide which insurers can participate.
Four mortgage insurers are participating in the pilot, according to Kevin Palmer, Freddie Mac's senior vice president of credit risk transfer, who declined to name the companies. Fannie Mae is working on a similar program it hopes to finalize in the fourth quarter, according to Rob Schaefer, vice president of credit enhancement strategy.
Executives at the mortgage giants have long expressed doubts that mortgage insurers could be trusted as reliable counterparties in the event of a crisis. They've argued that their companies already have exposure to too much risk if one or more mortgage insurers were to go belly up in a downturn, as some insurers did during the housing meltdown.
Fannie Mae and Freddie Mac don't make mortgages. They buy them from lenders, wrap them into securities and provide guarantees to investors in case borrowers default. Fannie Mae and Freddie Mac allow borrowers to make down payments of as little as 3% in some cases. But to lessen their risk, the companies typically require borrowers making a low down payment to purchase private mortgage insurance.
The insurance usually covers the first 18% to 37% of losses if a borrower defaults. U.S. Mortgage Insurers, a trade group, has lobbied to increase that coverage to 50%. The extra business would mean more revenue for the mortgage insurance industry. USMI's members include Radian Group Inc., Essent Guaranty Inc., Arch Capital Group Ltd, Genworth Financial Inc., MGIC Investment Corp. and NMI Holdings Inc.
Rather than deepen mortgage insurers' coverage of individual loans, the new Freddie Mac and Fannie Mae programs will likely let some insurers provide an extra 2.65% of coverage on pools of loans. With the expected mortgage volume of $4 billion, that would lead Freddie Mac to transfer a little more than $100 million-worth of risk.
The new deal will let Freddie Mac choose which mortgage insurers to do business with and require them to put up cash or cash equivalents as collateral based on how risky they view a particular mortgage insurer to be. With traditional mortgage insurance, lenders choose which insurers to use.
Mortgage insurers as of the end of last year took on about $184.5 billion in credit risk from Fannie Mae and Freddie Mac on $724.5 billion of mortgages, according to the FHFA.
"We shouldn't be trading credit risk for counter-party risk," Fannie Mae's Schaefer said.