and Freddie Mac
warned investors last week about growing concerns over their mortgage insurers.
"The already weak financial condition of many of our mortgage insurer counterparties deteriorated at an accelerated pace during the third quarter of 2011, which increased the significant risk that these counterparties will fail to fulfill their obligations to reimburse us for claims under insurance policies," Fannie said in its quarterly financial filing with the Securities and Exchange Commission
The government-sponsored enterprises owe a combined $151.7 billion in bailouts to the Treasury Department
Freddie has 18 eligible mortgage insurers, and Fannie has 15. The GSEs rely heavily on these firms to insure against borrower defaults on mortgages with loan-to-value ratios above 80%.
At Fannie, more than $386 billion in unpaid principal is covered by its insurers. At Freddie the number is $206.9 billion, according to their filings.
But the maximum amount both firms could receive in actual potential loss recoveries is significantly less. Fannie reported a maximum of $92.1 billion in possible payouts on its guarantee book of business, almost double the $53.7 billion for Freddie.
"Weak financial condition" fails to capture the stress many of their top insurers are under.
In August, both firms suspended the the PMI Group (PMI)
from insuring their loans after its regulator prohibited
it and its subsidiaries from writing new business. Payment claims will be paid out at 50% with the rest deferred.
In July, both Fannie and Freddie suspended Republic Mortgage Insurance Co.
and its affiliate in North Carolina. In October, RMIC and RMIC-NC agreed with their regulator to cease writing new business.
Triad Guaranty Insurance Corp.
agreed to pay out 60% of its claims in cash and defer the rest.
As of Nov. 7, four of their top mortgage insurers, PMI, RMIC, Triad and Genworth (GNW)
said they were either in run-off, lacked a waiver to continue operating in some states, or estimated they would not meet state regulatory capital requirements.
Another two, Mortgage Guaranty Insurance Corp. (MTG)
and Radian Guaranty (RDN)
said without additional capital contributions to their insurance writing subsidiaries, they too would fall below capital requirements in the future.
Combined, these six firms provided $75.7 billion, or 82% of Fannie Mae's risk under insurance coverage as of Sept. 30. At Freddie, these six combined for $40.5 billion in coverage.
Another problem exists. Both Fannie and Freddie disclosed in their filings that at least one major mortgage servicer entered into arrangements with two of the GSE mortgage insurers. Under the arrangement, the servicer – which was not named – would pay the insurer as long as the insurer agrees not to deny coverage of a GSE claim.
When this agreement is in place, Fannie and Freddie cannot make the servicer buy back a soured loan based solely on a denial of coverage. Unless the GSE can find another example the servicer or lender did not comply with guidelines, the GSE cannot force the servicer to buy back the loan.
In some cases, these contractual fixed insurance payments from the mortgage servicer are not enough to cover default claims that would have otherwise been denied. Because of the financial strain such a shortfall causes, the mortgage insurers may not be able to pay other claims to the GSEs.
"As guarantor of the insured loans, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its obligation to reimburse us for claims, and this could increase our credit losses," Freddie said in its filing.
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