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Justin Fitzhugh

Fannie Mae and Freddie Mac Preparing to Reduce Risk Exposure and Protect Taxpayers

Tuesday, July 15, 2014 - Article by: Justin Fitzhugh - Nations Lending Corporation - Message

July 6th, 2014, Federal Housing Finance Agencys (FHFA) Director Mel Watt called for public input on the requirements of private mortgage insurance companies that insure loan owned by Fannie Mae and Freddie Mac. Current law requires mortgage insurance for mortgages with loan-to-value ratio (LTV) of more than 80%. This insurance shifts the the first-loss exposure from taxpayers to the private market. The proposed requirements, drafted through a joint effort by FHFA, the GSEs, various state insurance commissioners, and private mortgage insurers, is intended to establish a framework that ensures liquidity, enhances operational performance, and provides remedial actions in case of failure. The Housing Agency welcomes input of the draft up to September 8th, 2014.

Fannie Mae and Freddie Mac suffered significant losses during the subprime lending crisis. Many mortgage insurers contributed to this problem when they were unable to pay claims. To prevent this from happening again, the Federal Government and the Housing Agencies launched a multi-year effort to strengthen many aspects of the existing housing finance system. Chief among them is the growth of private capital financing, which requires functioning and certain guarantees if it is to be seriously considered by investors.

The requirements are intended for private mortgage insurance companies, and set the standards and guidelines that insurers have to meet in order to become approved guarantors of loans owned by the GSEs. The requirements are designed to ensure that established and newly approved providers have the financial and operational capacity to back the loans they insure. The upcoming requirements will be more specific than those currently in place.

The FHFAs proprietary Mortgage Analytics Platform would play a pivotal role in the evaluation of insurers portfolio. The Agency published a white paper that provides a detailed description of it. This platform is currently used by the regulator for empirical analysis of policies using real life data. You can access the white paper here:

Outline of the requirements draft:

  1. Business Requirements and Policy Underwriting
  2. Policy Control
  3. Financial Requirements
  4. Failure to Meet Requirements
  5. Newly Approved Insurer Requirements

The FHFAs request for input poses questions related to:

  • Business Requirements
  • Newly Approved Insurer Requirements
  • Settlements and Changes to Enterprise Rights
  • Claims Processing and Loss Mitigation
  • Policies of Insurance
  • Quality Control
  • Financial Requirements
  • Macroeconomic Scenarios
  • Available Assets
  • Alternative Approaches to Determine Minimum Required Assets
  • Limitations Triggered by a Minimum Required Assets Shortfall
  • Risk Sharing and Reinsurance
  • Failure to Meet Requirements
  • Transitions Process

The 21 page Overview Draft can be accessed here:

The full Draft can be accessed here:

Again, we can submit input up to September 8th, 2014 here:

During United States Senate Committee on Banking, Housing, & Urban Affairs Hearing Housing FInance Reform: Fundamental Elements of a Functioning Private Label Mortgage Backed Securities Market, Georgetown University Law Centers Professor Adam J. Levitin discussed the history of private capital in the countrys housing market. Private capital has never funded more than 13% of the total market. He argued private capital cannot fund the size of our market, but perhaps with the new efforts by the Federal Government and the restructuring of the GSEs well have an ever more attractive environment which surpasses whatever highest levels weve seen in the past.

Nations Lending Corporation is a licensed in 47 states. As a direct agency lender, our mortgage branch opportunities are a better alternative to any mortgage net branch arrangement. When you work with us, there is no middle man, you get direct pricing and fast underwriting with minimum overlays. We are a better alternative than any net branch opportunities out there.

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