Freddie Mac announced changes to its mortgage insurer eligibility rules in anticipation of pending downgrades to various mortgage insurers, and as a bid to help shore up needed capital at insurers now seeing claims accelerate amid increasing borrower defaults. The McLean, Virginia-based GSE said that effective June 1, it will purchase loans with mortgage insurance provided by firms that don't meet higher-grade capital requirements. Freddie Mac said that it would suspend its insurer requirements for MI providers downgraded below AA-/Aa3, provided that insurers submit a remediation plan to Freddie for review within 90 days of any downgrade.
For those needing background on reinsurance: Under a captive contract, a mortgage insurer enters into a reinsurance contract with a captive mortgage reinsurer to reinsure a portion of the mortgage insurer's risk. The lender shares in the profits or losses of the mortgage insurer on the mortgage loans reinsured with the mortgage captive. For those really wanting to see how this works, an old paper from Mortgage Banking magazine does a good job explaining the concept.
Freddie also said it was capping gross risk/premium cedes to captive reinsurers at 25 percent in an effort to ensure that insurers maintained sufficient capital for their own claims paying ability. MI provider Triad Guaranty, Inc. hailed the move, according to a MarketWatch report, with CEO Mark Tonneson saying it would take "a bit of the ratings pressure off the industry." Tanta at the Calculated Risk blog notes that both GSEs have significant exposure to MI providers; she argues that while this change will require a bump to loss reserves at Freddie, such an outcome is more favorable an outcome than seeing a provider disqualified altogether by a ratings downgrade. Fannie Mae has not said if it will follow suit, but industry observers mostly expect a similar policy to emerge in the next few days.