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23 May 2014News

US muddling towards a solution in mortgage insurance

The US government is edging towards a public-private understanding over the provision of mortgage insurance that will see more private participation, but not as much as the commercial sector might want.

That is the view of Tom Dawson and Mike Byrne, partners in the insurance practice of Drinker Biddle, who argue that despite some expectations that a move might be made to wind down federal behemoths Fannie Mae and Freddie Mac, federal government provision of mortgage insurance will remain a significant component of the landscape.

“A few months ago the betting was that Fannie and Freddie would be wound up and that there would be a new Federal Housing Finance Authority (FHFA), with the explicit backing of the federal government. Following statements from Mister Watts [Mel Watts is the director of the FHFA] in mid-May and the failure of Congress to enact housing finance reform legislation, it seems that Fannie and Freddie will continue on the current course and remain operational,” says Dawson.

As such, private insurers will need to continue to work closely with Fannie and Freddie as they look to increase their involvement in mortgage insurance provision, he says.

As Dawson explains, “the FHFA is strengthening criteria for private mortgage insurers to remain part of the housing finance world and to work closely with Fannie and Freddie. A public-private division of the market will remain in place.”

Byrne says that the changes echo some of those that have taken place with the flood insurance market. “There are a lot of good ideas and intentions to release more risk into the private market, but when it comes to considering the short-term impact of these changes, there does not always seem to be the political will to deal with the consequences.”

He cited rate shock in the flood insurance market following reforms under Biggert-Waters as being a case in point, with political intervention having stymied a more brisk move towards risk adequate pricing.

Byrne says that part of the reticence in the mortgage insurance space is down to questions regarding the availability of credit if purely private market solutions are ramped up and whether those that need credit will be denied it in a more privately-orientated market.

Dawson says that recent statements by Watts suggest that there is still federal appetite to deliver solutions to low income households and those that would have difficulty acquiring loans and mortgage insurance coverage in the private market.

Byrne says that the FHFA seems to be looking to strike a balance, delivering federal solutions to those most in need of them, while encouraging the involvement of private capital to meet growing demand for private mortgage insurance.

“To help with this process we could probably use more information on issues such as defaults. In addition to credit scores and household income, there could be a more comprehensive examination of eligibility for mortgage insurance.”

“If we can then tie that in with the development of the private market, with federal backing for the most vulnerable households, there could be real positive development in the market”, says Byrne.

Byrne explains that the FHFA and the market are not starting with a clean slate and that as such the future of mortgage insurance provision will likely remain a public-private hybrid in the near term.

Addressing what is required of private players looking to work with Fannie and Freddie, Dawson says that they will have to conform to federal and state standards regarding policy form and solvency, but not necessarily direct federal regulation.

He says that states will take a lead in overseeing insurer solvency and the provision of products, with private companies having to work closely with state and federal authorities as they develop their offering.