The Federal Housing Finance Agency is attempting to reduce Fannie Mae and Freddie Mac’s credit risk exposure by revising its private mortgage insurance requirements.
On Thursday, the FHFA announced it is seeking input on drafting new requirements that would apply to private mortgage insurance companies that insure mortgage loans owned or guaranteed by Fannie and Freddie, opening up for comment until Sept. 8.
“Mortgage insurance counterparties must be able to fulfill their intended role of providing private capital, even in adverse market conditions,” said FHFA Director Mel Watt.
“FHFA’s Strategic Plan calls on Fannie Mae and Freddie Mac to strengthen the requirements for private mortgage insurance companies that do business with them in order to reduce Fannie Mae’s and Freddie Mac’s overall risk exposure and protect taxpayers,” Watt added.
Since the government-sponsored enterprises suffered significant losses during the financial crisis, the FHFA is requiring Fannie and Freddie to strengthen their existing counterparty risk management policies.
Under the current system, each enterprise has its own set of eligibility requirements that mortgage insurers must satisfy to obtain and maintain “Approved Insurer” status.
According to the report, “The draft Private Mortgage Insurer Eligibility Requirements reflects a multi-year effort to produce a clear and comprehensive set of standards.”
“The updated financial requirements incorporate a new, risk-based framework that ensures that approved insurers have a sufficient level of liquid assets from which to pay claims,” the report stated.
In addition, the draft requirements include enhanced operational performance expectations and define remedial actions that would apply should an approved insurer fail to comply with the revised requirements.
Once finalized, the eligibility requirements would become effective 180 days after the publication date, and “Approved Insurers” that do not fully comply with the financial requirements on the effective date will be given a transition period of up to two years to fully comply.