With private mortgage insurance expecting to insure more of the risk on future mortgage bonds associated with Fannie Mae and Freddie Mac, Kroll Bond Ratings Agency is ready to offer complex ratings to help investors understand the stability of private mortgage insurers.
Kroll Bond Rating Agency released its private mortgage insurer rating methodology this week, outlining the factors that it would use to assess the strength of private mortgage insurers.
So what should private mortgage insurers know about this ratings methodology?
Kroll will be looking at each firm's operations, management, competitive position, business risk, management strategy and systems.
And of course, KBRA is interested in assessing an insured portfolio using its residential mortgage default and loss model to detect the risk of default upfront, so losses are forecasted and covered in advance.
The third key factor that KBRA will observe is a company’s ability to pay claims – an issue that arose after the financial crisis when financial institutions and private mortgage insurers battled over whether insurance claims should be paid on mortgage loan pools that suffered through severe financial distress.
What KBRA wants to assess is whether firms have the ability to cover claims when under stressful financial situations?
KBRA’s decision to release the model bodes well for private mortgage insurers since it suggests private MI will continue to play a role in future GSE and private-sector securitization deals.
Mortgage insurers will be heavily scrutinized in the future, making Kroll's report timely for investors. This year, the Federal Housing Finance Agency issued its own "private mortgage insurers eligibility requirements" for insurers that would like to offer coverage on loans acquired by Fannie Mae and Freddie Mac.
During the financial crisis, some insurers found themselves without adequate capital to cover claims, leading to steep losses at Fannie and Freddie. Still, the GSEs rely on MI to offer first-loss protection on loans that exceed a certain threshold.
Kroll is merely following the due diligence trend by giving investors at every stage of the transaction a look at how much stress an insurer can withstand.