Standard & Poor's announced today that despite Fannie Mae and Freddie Mac’s placement into conservatorship, there is not enough downside risk to take any rating actions on the mortgage insurance industry right now.


The agency based its decision partly on the fact that neither the U.S. Treasury nor the Federal Housing Finance Agency has made any motions to alter the GSEs' counterparty credit policies toward mortgage insurers. Furthermore, S&P said that it did not expect a change in mortgage insurers' ability to cover loans sold to the GSEs and that the imposition of caps on the GSEs' investment portfolio does not pertain to mortgage insurers' core business of insuring loans sold to the GSEs.  “Mortgage insurers are providing capacity to the mortgage markets that is critical in today's environment. Therefore, it seems unlikely that the GSEs' new management would take actions that disrupt that capacity,” the rating agency said in a release today.


However the new management teams set up under the conservatorship could pose a risk to the treatment of mortgage insurers whose ratings have fallen below ‘AA-‘ Previously the GSEs have not imposed any additional restrictions on the four companies rated below 'AA-', including Mortgage Guaranty Insurance Corp., PMI Mortgage Insurance Co., Radian Guaranty, and Republic Mortgage Insurance Co., other than requiring a remediation plan to address the issues that led Standard & Poor's to downgrade them to below 'AA-'. This has been a positive for these companies’ competitive position, the rating agency said.


However, the GSEs' new management teams have the option to suspend mortgage insurer’s eligibility to sell loans to the GSEs and/or the restrictions the GSEs have always had for type II mortgage insurers, which are those rated below 'AA-'. If a GSE suspends a mortgage insurer's eligibility to sell loans to that GSE, the mortgage insurer's ability to write new business would be severely limited, S&P said. But at the same time, being designated a type II mortgage insurer by a GSE would probably not have a meaningful impact on that mortgage insurer's competitive position, the rating agency said. Type II mortgage insurers are not allowed to cede business to a captive reinsurer owned by a lender, and type II mortgage insurers must comply with additional ratios and restrictions.


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