July 14, 2014
Reiss on Mortgage Insurance Proposal
Law360 quoted me in FHFA Capital Rules Will Squeeze Older Mortgage Insurers (behind a paywall). It opens,
The Federal Housing Finance Agency on Thursday released proposals that would impose higher capital requirements on private mortgage insurers doing business with Fannie Mae and Freddie Mac, but experts say insurers with bubble-era mortgages in their portfolios may find it tough to meet the new mandates.
The new standards will force mortgage insurers to determine the amount of cash and other liquid assets they retain to cover potential payouts using more of a risk-based formula than they have up to this point, meaning that the riskier the mortgage, the more capital will be required.
Because of that, mortgage insurers that were in business during the housing bubble era and have older loans on their books will be hit harder than insurers that have only post-financial crisis loans on their books, said Paul Hastings LLP partner Kevin Petrasic.
“The older vintage mortgages have more challenging issues than the newer mortgages,” he said.
Fannie Mae and Freddie Mac are barred from backing mortgages where the borrower has contributed less than a 20 percent down payment without getting private mortgage insurance to make up the difference. The insurance on those mortgages absorbs any losses before Fannie Mae and Freddie Mac do in the case of default, in essence putting private money before taxpayer money.
During the financial crisis, private mortgage insurers paid out billions of dollars on bad mortgages even as Fannie Mae and Freddie Mac took on over $180 billion in federal bailout money in the fall of 2008, when they were put under the FHFA’s conservatorship.
However, the financial crisis also saw many of the larger mortgage insurers fail under the weight of the huge number of claims they had to cover, contributing to Fannie and Freddie’s collapses.
“The history of the mortgage insurance industry is a history of good profits during good times and catastrophic losses in bad times,” said Brooklyn Law School professor David Reiss. “It seems like what the FHFA is doing is saying we don’t want the taxpayer on the hook during the next period of catastrophic losses.”
That is exactly what the FHFA says it intends with its new regulations, part of a so-called strategic plan to strengthen Fannie Mae and Freddie Mac and to bring more private money into the mortgage market.
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