The Federal Housing Finance Agency released a draft of tougher new standards for the private mortgage insurers that cover the risk on low-down-payment loans for Fannie Mae and Freddie Mac.
The insurers would have two years to meet the new financial requirements, which include a minimum of $400 million in liquid assets that are available to pay claims on defaulted mortgages. A 60-day comment period on the draft standards ends Sept. 8.
Once the transition is complete, the government-sponsored enterprises would expect the insurers to be able to withstand a stressed economic scenario like the recent housing bust, which forced the liquidation of several MI firms.
"Mortgage insurance counterparties must be able to fulfill their intended role of providing private capital, even in adverse market conditions," said FHFA director Mel Watt in a press release. "FHFA's strategic plan calls on Fannie Mae and Freddie Mac to strengthen the requirements for private mortgage insurance companies that do business with them in order to reduce Fannie Mae’s and Freddie Mac’s overall risk exposure and protect taxpayers."
Fannie and Freddie currently rely on credit rating agencies and their ratings in determining an insurer's financial strength.
Under the new standards, MIs would have to meet risk-based standards that reflect the performance and characteristics of the underlying loans. MIs would be required to hold at least 5.6% of their insurance in force in liquid assets to back up the loans they insure. That is a "floor," one GSE official said. It could be higher depending on the risk profile of the insured loans.
The definition of available liquid assets would include the market value of affiliates that are publicly traded after a 25% haircut. Affiliates that are not publicly traded would not be considered as a source of financial strength or liquidity.
National MI, a newly formed mortgage insurer without legacy assets from the bubble years, welcomed the new standards.
"National MI believes that the proposed eligibility requirements for private mortgage insurers will go a long way to help restore confidence in an industry affected by the recent housing crisis," said Bradley Shuster, chief executive of National MI, which is a newly formed mortgage insurer, in a press release.
"A strong and financially sustainable private mortgage insurance industry is a key component of a healthy residential mortgage market."
An incumbent mortgage insurer, Radian, was more tepid with its praise.
"Radian fully supports the need for strong counterparties to Fannie Mae and Freddie Mac, and the need for well-defined standards against which private mortgage insurers should be measured," said Radian Guaranty President Teresa Bryce Bazemore.
However, the Radian press release said the proposed capital requirements are "more onerous than Radian's historical default experience suggests would be needed to withstand a severe stress event."