Comments Invited on new PMI Provider Requirements

The Federal Housing Finance Agency (FHFA) has released new draftrnrequirements for private insurance companies that insure mortgages purchased byrnthe two government sponsored enterprises (GSEs) Freddie Mac and FanniernMae.  FHFA is inviting public comment onrnthe draft which incorporates standards for financial capital requirements, enhancedrnoperational performance expectationsrnand defines remedial actions that would apply should an approvedrninsurer fail to complyrnwith the revised requirements.</p

The GSEs are required by their charters to obtain private mortgagerninsurance (PMI) on loans they purchase or guarantee that have loan-to-valuernratios exceeding 80 percent.  Provisionrnof this insurance is limited by the GSEs to the companies they have approved torndo so.  Using private insurance from arnsound counterparty, FHFA says, helps reduce the loss from default and shifts first-lossrnexposure from the Treasury and taxpayers to a third party.</p

The GSE’s each<bmaintain their own lists of approved insurers and their own criteria forrnapproval. These criteria have not been updated since 2003 in the case of FanniernMae and 2008 for Freddie Mac.  Thernexisting requirements rely primarily on an acceptable rating by a major ratingrnagency as opposed to specific counterparty risk and financial standards definedrnby a GSE.  They also do not adequately,rnin FHFA’s estimation, address the liquidity of capital.</p

During thernfinancial crisis and the resulting rise in defaults and foreclosures mortgagerninsurers and the GSEs suffered significant losses.  Several PMI companies were taken intornreceiverships by state insurance commissioners which regulate their operationrnand others stopped writing new business.</p

When FHFA as theirrnconservator began the process of aligning the operations of the two GSEs itrndirected them to revise,rnexpand and align their riskrnmanagement requirements for the insurance and insurers.  The current draft, the agency said, is thernresult of a multi-year effort to produce a clear and comprehensive set ofrnstandards.  FHFA and the GSEs have consultedrnwith state insurancerncommissioners and private mortgage insurersrnthat are currently approved to do businessrnwith Fannie Mae orrnFreddie Mac regardingrnthe draft requirements.rn</p

“Mortgage insurance counterpartiesrnmust be able tornfulfill their intendedrnrole of providing private capital,rneven in adversernmarket conditions,” FHFA DirectorrnMel Watt said. “FHFA’s StrategicrnPlan calls on Fannie Mae and Freddie Mac to strengthen the requirements for private mortgage insurance companiesrnthat do business withrnthem in order to reduce Fannie Mae’srnandrnFreddie Mac’s overallrnrisk exposure and protectrntaxpayers.”</p

FHFA will bernaccepting public comment on the draft requirements for 60 days or untilrnSeptember 8, 2014.  The requirements,rnwhen finalized, will apply only to private insurance providers which are currentlyrnapproved to write policies for GSE loans or wish to be approved to do so. </p

The eligibility requirements will become effectivern180 after the final version is published. rnIn the interim any approved insurer that does not fully meet each GSE’srnexisting eligibility requirements would continue to operate in its currentrnstatus while transitioning to the new standards.  An approved insurer that does not meet all ofrnthe financial requirements would have two years to fully comply

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