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MBA urges GSE regulator to expand risk sharing with private insurers

Government-sponsored enterprises Fannie Mae and Freddie Mac need to adopt a safer and more transparent model for offloading billions of dollars of mortgage risk, the Mortgage Bankers Association (MBA) told the GSE regulator this week.

In a letter to the Federal Housing Finance Agency’s (FHFA) Director Mel Watt, MBA President David Stevens urged the agency to consider expanding the role of private insurers. 

The FHFA now requires the GSEs to enter into credit-risk transfers (CRTs) with investors. Since 2013, the GSEs have transferred much of the default-loss risk on a series of home loans that together have unpaid principal balances totaling more than $700 billion.

In return for regular payments, banks, insurance companies and hedge funds have agreed to assume the losses should those loans default. These deals have come under fire, however, for being complex and lacking in transparency.

Stevens wrote that the current risk-sharing deals are “back-end” arrangements, where the GSEs warehouse the risk. The deals lack transparency on pricing the risk and the terms of the CRTs, he wrote. The approach also exposes the GSEs to potential losses from swings in credit spreads. The agencies, and therefore taxpayers, also retain a substantial amount of risk over the life of the loan.

He said a better system would use up-front risk sharing, which would take taxpayers off the hook before the GSEs acquire the loans. He mentioned some options that could be piloted, but spent the bulk of the letter making the case that private insurers were capable of assuming the risk. 

Stevens addressed several criticisms used to support claims that the private insurance industry would fail, or was unreliable.  For example, he dismissed arguments that private insurers won't support affordable-housing goals, fail to pay claims and couldn't build up the capital to survive a catastrophic downturn.

“We wanted to stress that we don’t view [mortgage insurance] as the sole solution to meet the demands of up-front risk share,” Stevens wrote. “However, we felt the need to acknowledge the importance of [mortgage insurers] in this equation given all the expressed concerns MBA has heard.” 

He also said using private mortgage insurance “would be operationally easiest for the vast majority of lenders.”

The idea of widening the role of private insurances has other supporters.

Glen Corso, executive director of the Community Mortgage Lenders of America, said the plan could potentially lower the costs for borrowers by eliminating loan-level charges levied by the GSEs.

“Borrowers would pay a larger mortgage-insurance premium for deeper coverage than they currently pay for standard coverage, but the calculations we have seen indicate that the cost of the higher premiums would be less than the savings realized by elimination of the loan-level charges, hence an overall savings for borrowers,” Corso said.

Spokespersons for Fannie Mae and Freddie Mac declined to comment on the MBA's letter. 


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