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June 30, 2015

New Capital Requirements for Lender Paid Mortgage Insurance

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New capital requirements for Lender Paid Mortgage Insurance to help reduce risk

Freddie Mac today notified lenders it is revising the Private Mortgage Insurer Eligibility Requirements (PMIERs) to incorporate higher capital requirements for loans with Lender Paid Mortgage Insurance (LPMI). Like the PMIERs released in April, the new provisions were developed with Freddie Mac’s regulator/conservator, the Federal Housing Finance Agency.

Unlike borrower paid mortgage insurance, LPMI loans are exempt from provisions of the Homeowners Protection Act that require MI policies to be automatically cancelled when borrowers are current on their payments and their loan balances reach 78 percent of the original property value. As a result, LPMI loans expose mortgage insurers to higher losses relative to loans with borrower paid mortgage insurance, and therefore it was necessary to incorporate this into the PMIERs.

The revised PMIERs specifies the capital, in the form of additional risk feature multipliers, insurers approved to do business with Freddie Mac must hold to offset the higher LPMI loss exposure. The changes will only apply to new LPMI coverage written after the PMIERs take effect December 31, 2015.

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