FHFA Rejects Call for Tighter Oversight of Mortgage Insurers
The Federal Housing Finance Agency has rejected in part or fully each of three recommendations made by its Inspector General regarding its oversight of Fannie Mae's and Freddie Mac's relationships with private mortgage insurers.
The inspector general's audit, conducted by the accounting firm CohnReznick, says the agency should have issued formal guidance to Fannie Mae and Freddie Mac about doing business with the MIs that were in a weakened financial state during the bust.
The report calls for FHFA to create an oversight plan that should "clearly define the policies and procedures use to achieve FHFA objectives concerning [government-sponsored] enterprise use of mortgage insurance as a credit enhancement and risk management tool."
The inspector general's criticism comes at a crucial time in the GSEs' relationships with mortgage insurers. The FHFA, in its role as the GSEs' regulator and conservator, has ordered that a new master policy should be created to address issues which cropped up during the bust. The new agreements will address the MIs' rescission policies, loss mitigation efforts and promote the sharing of information among all parties. While several of the private MIs have announced they have crafted new master policies, FHFA and the GSEs have yet to set an implementation date.
"Well-defined policies and procedure are particularly important as FHFA and the enterprises proceed with the implementation of new master policy agreements and eligibility requirements for mortgage insurers," the inspector general notes.
The FHFA, in response, says it will enhance the coordination among its units already responsible for mortgage insurer oversight. This includes discussing mortgage insurer issues as a regular topic for the Supervision Committee and the Conservatorship Governance Committee. It will not issue a formal policy statement.
The FHFA outright rejected the report's second recommendation, which calls for the agency to approve all new mortgage insurers, rather than let Fannie Mae or Freddie Mac do so.
"We continue to believe that the responsibility to assess, manage and approved counterparties is the direct responsibility of the enterprises," the agency's response to the report says.
In the inspector general's response to the FHFA, it says it does not consider new mortgage insurer approvals to be part of the day-to-day activities of Fannie Mae and Freddie Mac.
This is in light of the small number of mortgage insurers (nine listed by name in the report) and the fact that five are considered "financially stressed."
There was $587 billion of insurance-in-force on loans sold to the GSEs as of June 30, 2013. About $202 billion of that was with the five stressed companies: Genworth, $84 billion; PMI, $49 billion; Republic Mortgage Insurance Co., $40 billion; Triad, $15 billion; and CMG (which has since been sold and renamed Arch Mortgage Insurance), $14 billion. Only Genworth and Arch are currently writing new business.
The report says Radian and MGIC, each with about $126 million of insurance in force, were once considered to be distressed but at the time the study was conducted, they had added enough capital to regain compliance with risk-to-capital requirements.
The "one size fits all approach" currently used by the FHFA regarding new MI approval does not take into account the operational and financial risk to Fannie Mae and Freddie Mac associated with a new MI which could be doing business with numerous loan sellers, the inspector general says. It is also worried about consistency in the approval process and the concerns of federal and state regulators.
Specifically, the report mentions the approval process for National MI. Fannie Mae and Freddie Mac gave conditional approvals for this company. Among the conditions is that National MI has to have a 15-to-1 risk-to-capital ratio, tougher than the 25-to-1 that 17 states require (the others do not have any risk-to-capital or similar requirements).
The report states that the FHFA did not document its own evaluation to determine whether the GSEs' review process covered all potential risks and if the conditional requirements mitigated those risks.
The third recommendation, which is related to the second one, is for the FHFA to develop an approach to review new mortgage insurers and adequately document its conclusions from those reviews.
The FHFA's response says it is working with the GSEs to establish new mortgage insurer approval standards, including creating minimum eligibility requirements for companies that want to do business with Fannie Mae and Freddie Mac.
The inspector general says the FHFA is nonresponsive to the recommendation because it will not develop the review process the report calls for.
National MI said it "must comply with GSE requirements, including those set out in its approval letters, on an ongoing basis.” The company received approval in January 2013 and started underwriting in April of that year. Currently, its risk-to-capital ratio is significantly below the statutory risk to capital limit. It has been adding customers using a master policy form which offers rescission relief after only 12 months (which is more favorable to lenders than the current standard master policy).
Calls to the new mortgage insurer trade group USMI were not returned.
The FHFA would not discuss the matter beyond its comments in the report.