S&P Offers Benchmark for Pool Insurance Pricing

Standard & Poor's has developed a model to help set capital standards for the companies offering a controversial new mortgage insurance product.

At issue is GSE pool insurance, through which mortgage insurers assume some risk on loans that lenders are selling to the government sponsored enterprises Fannie Mae and Freddie Mac.

The policies reduce loan risk, strengthening lenders' positions in negotiating with Fannie and Freddie for lower guarantee fees.

The product was first offered last year and became increasingly controversial as suppliers cut prices to compete.

"GSE pool insurance is definitely problematic," said Charles Titterton, an S&P analyst who follows the mortgage insurance industry. "The pricing is horrible."

The model would be used to evaluate the pricing, Mr. Titterton said.

S&P would require additional reserves if the model showed the price were too low to cover the risk.

The price war has kept some companies out of the business.

Republic Mortgage Insurance Co. has bid on requests for GSE pool insurance but hasn't won any business, said Chris Nard, a vice president. The Winston-Salem, N.C., company wouldn't cut its premiums enough, he said.

Mortgage insurance has been extremely profitable business in the 1990s, but profits have been scarce in home lending-so many lenders have turned to insurers for ways to boost the bottom line.

To help, insurers have been offering products such as GSE pool and captive reinsurance in the last year.

Lenders have been more interested in the pool product because it pays off faster, Mr. Nard said.

Captive reinsurance involves a partnership in which an insurer assumes some of a lender's risk and in turn lays off part with the lender. But that requires the lender to establish a freestanding reinsurance subsidiary, and the practice has raised questions about kickbacks.

Although many in the industry acknowledge that GSE pool insurance is unprofitable, insurers are writing it in hope of selling the customer primary mortgage insurance, which is more profitable.

But Mr. Titterton said companies not writing pool insurance will discount prices on primary insurance to protect that business.

Industry sources confirmed that Freddie Mac had reduced guarantee fees on loans with pool insurance. But Freddie has stopped buying the insured pools, some observers said, so sales of the coverage will decline.

Fannie Mae is still buying insured pools, but Frank Demarais, vice president for product development, said it has not encouraged lenders to buy the insurance.

Fannie's view is that there is no good reason to pass risk onto the mortgage insurer, Mr. Demarais said.

"We have a fundamental belief that we have a strong history of managing credit risk," he said, so supplementary insurance is superfluous.

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