As I have previously posted HERE Moody's has recently downgraded the ratings for several private mortgage insurance companies and is looking at the impact of these downgrades on state housing finance agencies, including Oregon's.Since Fannie and Freddie also use private mortgage insurance for loans above 80% loan to value I decided to look more closely at how much exposure the GSE's have to potential credit losses if private mortgage companies fail to pay claims.
I focused on Fannie and found:
- Fannie says that they have a maximum of $118.7 Billion in single family mortgage credit insurance in their guarantee book of business in place as of December 2008; that's ONLY 4% of their total guarantee book of business. Fannie also says at the end of 2008 they had $1.2 Billion in receivables from private mortgage insurance companies (See 2008 10k form, page 192 HERE).
- Moody's expects that private mortgage insurance companies rated at A3 will have the ability to pay 40% of the claims presented for an Aaa bond. For companies rated Baa1 or below, the expected claims paying ability for an Aaa rated bond drops anywhere from 30% to zero.
- Unfortunately, Fannie has only one private mortgage insurance company with a rating of A 3, United Guaranty Residential Insurance Company. That company provides only 14% of the coverage provided by private mortgage insurance companies for Fannie.
- This means that the remaining companies provide 86% of the private mortgage insurance coverage for Fannie and all of those companies are rated in the B tier of ratings, OR they are unrated.
The GSE regulator recently issued a letter HERE to the private mortgage insurance industry organization indicating that existing PMI would NOT be dropped on GSE loan refinances, but the letter does not directly address PMI on loan modifications.
This raises a second question. If the market is using the "effective" full faith and credit rating of the federal government instead of the claims paying ability of private insurers as a factor in rating Fannie debt, would it be LESS EXPENSIVE (for the government and borrowers) to NOT require the continuation of private mortgage insurance on loans refinance or modified under the upcoming HASP program? (Since for HASP loan modifications,PMI would possible/likely be a partially government funded cost that will be factored into getting borrower down to 31% debt to income ratio).
Put differently, is the borrower paying for a cost now that won't provide significant benefit to the government and, will the government end up paying a portion of those costs for the borrowers to get the debt ratio down to 31% for a modified loan?
I don't have an answer to these questions.
I am wondering what YOU think about the pros and cons of continuing to require private mortgage insurance on HASP modified loans, refinances, or for that matter any Fannie loan, if the likelihood of Fannie collecting claims payments is already significantly diminished?. If ultimately the payout will be the same AND at least the government would be collecting the mortgage insurance premiums, would net government costs be less if mortgage insurance was switched to FHA or RD?
Bottom Line: Is the government propping up "Zombie" private mortgage insurance companies by keeping private mortgage insurance in place on Fannie Mae refinanced or modified loans, when the likelihood of those companies continuing to fully pay claims is in serious doubt?
If you have some thoughts drop them in the comment box below.
Ending pmi on these loans would make affordability much easier to establish, but if Fannie and Freddie stop requiring pmi on these loans, will it start a trend that will negatively impact the viability of the insurers even more? Without an adequate number of companies offering pmi, will it become even more difficult to get loans with less than 20% down? Maybe not, if fha has an infinite ability to finance loans...or, will taxpayers then be asked to bail out pmi companies to keep them viable?
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