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Freddie Mac Gives Mortgage Insurers a Break

Reuters
Thursday, 14 Feb 2008 | 3:24 PM ET

Freddie Mac, the No. 2 U.S. home funding company, said it will give its private mortgage insurance partners some relief by reducing the amount of money they must put into Freddie Mac's reinsurance system, leaving them more reserves to cover failing loans.

AP

The company said the change was triggered by the decline in home prices and the poor performance of subprime, Alt-A and other higher-risk mortgages. The temporary change is aimed at enabling mortgage insurers to retain more insurance premiums to pay current claims and rebuild their capital base, it said.

Mortgage insurers have been battered with losses as borrowers missed payments and investors stopped buying a wide variety of debt perceived to carry too much credit risk.

The action concerns Freddie Mac's captive reinsurance structure, in which the mortgage insurer pays a portion of its premium income to a special trust set up to cover a previously agreed share of losses from a pool of mortgages.

Effective on or after June 1, the portion of the premiums that Freddie Mac-approved private mortgage insurers pay to captive reinsurers, or cede, will be limited at 25 percent, the company said in a news release.

"Beyond limiting the allowable cede to 25 percent, the temporary policy does not limit the mortgage industry's use of captive reinsurance," the company said.

Private mortgage insurance enables Freddie Mac to buy loans when a borrower makes a down payment of less than 20 percent of the purchase price.

Standard & Poor's Ratings Services and Moody's Investors Service have recently announced actions on a number of mortgage insurance companies due to continued U.S. housing market stress and the performance of different types of mortgages.

Mortgage insurance is generally required on loans made to home buyers who put up less than 20 percent of the purchase price in a down payment. Fannie Mae and Freddie Mac cannot buy the loans without insurance.

That rule should force mortgage insurers to keep more cash on hand to pay claims and meet regulatory capital requirements.

With captive reinsurance, a mortgage insurer cedes a portion of its premium income to a special trust set up to cover an agreed-upon share of losses from a pool of mortgages.

Freddie Mac also said it will require all eligible private mortgage insurers to provide additional information about their business activities to better monitor the state of the industry.

Freddie Mac also said it is suspending its Type II Insurer requirements otherwise automatically applicable to mortgage insurers that are downgraded below AA- or Aa3 by rating agencies, provided the mortgage insurer commits to submitting a complete remediation plan for review and approval within 90 days of the downgrade.

Freddie Mac said it reserves the right to impose additional restrictions at its discretion.

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