Bloomberg News

Fannie-Freddie Propose Liquidity Standards for Mortgage I

July 10, 2014

Private mortgage insurers looking to do business with Fannie Mae and Freddie Mac would have to hold minimum amounts of liquid assets under new standards proposed today by the companies and their regulator.

To back loans packaged into securities by the U.S.-owned mortgage-finance giants, insurers would have to hold liquid assets worth at least 5.6 percent of their risk exposure, and possibly more depending on the quality of the loans they cover. The standards were released for public comment before they are finalized.

“Mortgage insurance counterparties must be able to fulfill their intended role of providing private capital, even in adverse market conditions,” Melvin L. Watt, director of the Federal Housing Finance Agency, said in an e-mailed statement.

Mortgage insurers cover losses when homeowners default and foreclosures fail to recoup costs. The new standards are designed to ensure there’s no repeat of what happened after the financial crisis, when a plunge in home prices pushed about half the industry out of the business, including PMI Group Inc. and Triad Guaranty Inc. Fannie Mae and Freddie Mac (FMCC:US) were saddled with losses when insurers were unable to meet their obligations.

Survivors led by MGIC Investment Corp. (MTG:US) and Radian Group Inc. (RDN:US) have raised fresh funds so they can sell more coverage as home sales recover. Those companies received permission from some state regulators to keep selling coverage after their levels of risk relative to capital breached limits.

Market Share

The insurers, which win almost all of their business on Fannie Mae and Freddie Mac loans, have regained market share after the Federal Housing Administration raised how much it charges for similar coverage, and the firms loosened standards and lowered fees as housing stabilized. Their coverage is also becoming increasingly important to the mortgage market as more new loans get made for home purchases, rather than refinancings.

Private firms provided 38 percent of mortgage insurance in the first quarter, up from 32 percent from a year earlier and 15 percent in 2009, according to data from newsletter Inside Mortgage Finance. Private insurance covered 13 percent of new mortgage debt in the first quarter, up from 9 percent a year earlier and 4 percent in 2009. Investors including George Soros and Kyle Bass have backed mortgage guarantors Essent Group Ltd. (ESNT:US) and NMI Holdings Inc. (NMIH:US), started after the crash. Both firms went public last year. Arch Capital Group Ltd. (ACGL:US) acquired assets from PMI to start its own mortgage guarantor, while Essent struck a deal to buy technology from Triad.

American International Group Inc. (AIG:US)’s United Guaranty Corp. was the top seller of private mortgage insurance in the first quarter of this year, according to data compiled by Inside Mortgage Finance. AIG used funding from its U.S. bailout to help support the unit.

Radian was the No. 2 seller of the coverage and MGIC was No. 3. Genworth Financial Inc. (GNW:US), which also offers life insurance and long-term care coverage, is fourth.

To contact the reporters on this story: Clea Benson in Washington at cbenson20@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net; Maura Reynolds at mreynolds34@bloomberg.net Gregory Mott


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Companies Mentioned

  • FMCC
    (Federal Home Loan Mortgage Corp)
    • $2.18 USD
    • 0.19
    • 8.72%
  • MTG
    (MGIC Investment Corp)
    • $9.06 USD
    • 0.31
    • 3.42%
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