The Federal Housing Finance Agency (FHFA) released a draft for new eligibility requirements for private mortgage insurers who insure mortgage loans owned or guaranteed by Fannie Mae and Freddie Mac. The agency is seeking comments on the draft and will accept input through September 8.
According to their charters, the GSEs must acquire private mortgage insurance for any loans with loan-to-value ratios higher than 80 percent. Private mortgage insurance companies take a first-loss position and serve as a buffer in order to deflect losses to taxpayers when mortgage loans default.
Current eligibility requirements "do not adequately consider liquidity of capital" and "rely primarily upon an acceptable rating by a major rating agency as opposed to specific counterparty risk and financial standards," according to FHFA.
Additionally, FHFA pointed out neither GSE has updated its eligibility requirements in the past several years. Fannie Mae last revised its requirements in 2003, and Freddie Mac's latest revisions took place in 2008.
"Updating eligibility requirements for mortgage insurers is an important part of reducing risk to taxpayers and building a safer, stronger housing finance system for the future," said Andrew Bon Salle, EVP of single-family underwriting, pricing, and capital markets at Fannie Mae.
FHFA's proposed draft will align the requirements at both GSEs and address insurers' operational performance and the level of liquid assets available for claim payments.
"The draft requirements seek to ensure that mortgage insurance companies have sufficient liquidity to pay all claims under a potential future stress scenario, are appropriately capitalized, have strong risk management functions, and can meet new business standards," Bon Salle said.
Gina Healy, VP of mortgage insurance and credit risk at Freddie Mac, said with FHFA's request for input, "The draft eligibility standards issued for public input today will strengthen counterparty requirements for private mortgage insurance industry that will continue to play a key role as a source of private capital in mortgage markets."
FHFA is updating private mortgage insurance standards at the GSEs as part of the agency's strategic plan, which aims to reduce taxpayer risk.
"Mortgage insurance counterparties must be able to fulfill their intended role of providing private capital, even in adverse market conditions," said Mel Watt, director of FHFA.