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Perspectives
April 20, 2015

Strengthening the Mortgage Insurance Industry

Donna Corley
By
Donna Corley, SVP Single-Family Chief Risk Officer

Private mortgage insurance (PMI) plays an important role in the mortgage finance system because it makes homeownership possible when 20 percent down payments are an obstacle to otherwise qualified borrowers.

The 2008 housing crisis underscored the importance of the mortgage industry to maintain a financially strong and resilient system that can provide consistent liquidity and broaden the access America's borrowers have to affordable mortgage credit in good times and bad.

Freddie Mac and Fannie Mae worked under the direction of the Federal Housing Finance Agency to strengthen our company's Private Mortgage Insurer Eligibility Requirements. The requirements announced on April 17 include financial and risk management standards for Freddie Mac's insurer counterparties that incorporate lessons learned from the recent downturn, certain best practices drawn from the broad financial industry, and Freddie Mac's risk management framework.

The PMI eligibility standards are designed to preserve the key role that private mortgage insurers play in making private capital available in mortgage markets. Private mortgage insurance supports Freddie Mac's mission to continuously make affordable mortgages available to America's borrowers while minimizing risks to our company in line with our chartering act.

The revised eligibility standards are effective immediately for any new mortgage insurer applying to do business with Freddie Mac, and will take effect on December 31, 2015, for insurers approved under our previous requirements. To continue doing business with Freddie Mac, insurers, will have to meet a number of new or enhanced financial standards, including:

  • Specific financial requirements that focus on a risk-based standard of each Approved Insurer's portfolio measured against the liquid capital investments available to pay claims under a scenario of significant market stress. Insurers will have several options to meet these new requirements, such as raising new capital, entering into reinsurance contracts, and replacing illiquid assets with liquid assets.
  • An operational scorecard that is comprised of key performance metrics designed to incent sound business practices and evaluate against key benchmarks.
  • Quality control requirements designed to ensure approved mortgage insurers have a strong internal risk management infrastructure to evaluate underwriting practices and establish adequate controls.

Once the revised eligibility requirements are fully implemented, they will help bring greater levels of certainty and new private capital to the mortgage market. Meanwhile, we will continue to explore ways to broaden access to mortgage credit, while reducing risk to taxpayers, and building a sound and stable housing finance system for future borrowers.

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