Arch deal with FHFA creating appetite for private solutions


Arch deal with FHFA creating appetite for private solutions

Following the success achieved by Arch at the end of last year in unlocking mortgage insurance risk from state-backed Freddie Mac, the Federal Housing Finance Agency has signalled its intent to seek further private market solutions.

The FHFA told Bermuda:Re that such solutions would include traditional private re/insurance capacity and securities, which have proved increasingly attractive to US institutional risk-takers of late, attracted by competitive pricing and abundant capacity.  

The development presents opportunities for those re/insurers with the capabilities and footprint to take on US mortgage insurance risk, either in traditional or convergence form. And the scale of the opportunity is considerable.

Over the past 12 months mortgage originations in the US amounted to $1.2 trillion. Of this, perhaps half of that risk will make it into the mortgage insurance market. If this is then considered in the light of a four-year portfolio of mortgage insurance risk, the market has the potential to generate around $10 billion of premiums annually.

The potential for further premium to make its way into the private market appears strong. While Arch’s initial deal with Freddie Mac provided $77.4 million of coverage to the federal home loan mortgage corporation, there is evidently considerable scope and appetite for growth.

In a recent statement, FHFA director Mel Watt said that the “FHFA will encourage Fannie Mae and Freddie Mac to continue undertaking these types of risk-sharing transactions as we consider risk-sharing objectives for 2014.”

While Arch’s trail-blazing deal was only with Freddie Mac, it is apparent that further opportunities exist to take on mortgage insurance risk from both Freddie Mac and Fannie Mae, following the FHFA’s signal of intent.

Such a move enjoys wide bi-partisan support in Washington, although there is the potential for a brake on reform, much as has happened under Biggert-Waters and flood reform. The debate is ongoing as to exactly mortgage insurance risk will be transferred into the private market, but is evident that others are looking to follow Arch’s footsteps.

It is likely that potential participants will need to have or develop a viable US footprint, much as that developed by Arch recently following its acquisition of two US mortgage insurers. Fannie Mae and Freddie Mac are looking for credible long-term partners able to bring considerable capacity to bear.

The FHFA regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks, which together provide more than $5.5 trillion in funding for the U.S. mortgage markets and financial institutions. 

Arch, FHFA, mortgage insurance, Freddie Mac, Fannie Mae

Bermuda Re