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Risk-sharing pilot expands role of private insurers

Freddie Mac rolled out a new risk-sharing pilot program this week to test the waters for eventually seeking deeper coverage of loan-default risk through private mortgage insurers.

Dubbed “Deep MI CRT,” the pilot was billed as a front-end risk-sharing model that will de-risk a portion of the default risk of mortgages at the time Freddie purchases the loans. Freddie and its regulator, the Federal Housing Finance Agency (FHFA), announced the program on Monday. Essentially, Freddie will auction off the default risk to a pool of insurers and reinsurers.

Risk"The pricing certainty provided by day-one coverage offers us an economically sensible way to transfer mortgage credit risk away from taxpayers," said Kevin Palmer, Freddie’s senior vice president of credit-risk transfer. “Deep MI CRT embodies all the core elements of our single-family credit-risk transfer program, and also helps us expand our important relationships with mortgage insurers.”

The national trade group, U.S. Mortgage Insurers, however, said Freddie’s pilot isn't the type of risk sharing that would greatly expand the role of private insurers that the industry has sought.  

For loans with downpayments less than 20 percent, private insurers currently can cover up to 35 percent of the value of a loan purchased by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The industry has suggested increasing that coverage to 50 percent of the value, so-called deeper coverage. 

Freddie’s pilot, however, doesn’t allow insurers to cover a deeper portion of the loan’s value. It is an extension of Freddie pre-existing Agency Credit Insurance Structure (ACIS) deals, which have already been used in 20 transactions to transfer $5.3 billion in risk. 

The pilot will run from September through February, and encompass 10 percent of the loans purchased by Freddie Mac. The pilot includes only loans with loan-to-values above 80 percent. 

The coverage in the pilot is "deeper" only in that insurers will be covering additional risk that is normally retained by Freddie in the pools. The investors will cover an additional 265 basis points of default losses in the pools.

The U.S. Mortgage Insurers, however, sees the pilot as essentially an expansion of Freddie's existing back-end risk-sharing model.

“While some mortgage insurers are exploring and may ultimately participate in this new credit insurance program, we believe it is important to note that this new structure should not to be confused with the deep-cover, true mortgage insurance front-end credit-risk transfer proposal that we and others have been advocating for,” said Lindsey Johnson, president and executive director of the U.S. Mortgage Insurers.  

Freddie and its cousin, Fannie Mae, have been offloading most of the default risk on 30-year fixed-rate mortgages through sales of securities to a few big banks and large investors. In essence, the investors in those securities take on risk for a temporary period in exchange for payments. These are known as back-end deals.

Front-end risk sharing, by contrast, de-risks the loan before the GSEs purchases the loans.

Front-end risk sharing is supported by several industry trade groups, such as the Mortgage Bankers Association, who believe the pricing will be more transparent, and the deals will be open to more companies. 


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