The debate over the future of mortgage insurance may soon move to a new arena.
Rep. James V. Hansen, R-Utah, said last week that he plans to ask the General Accounting Office to "take a comprehensive look at the mortgage insurance industry and whether alternative, more efficient means of default-loss protection exist."
Rep. Hansen said his request was prompted by a mortgage insurance cancellation law that took effect last Friday and by insurance alternatives announced this year by Fannie Mae and Freddie Mac.
These developments illustrate "the evolution of mortgage insurance's role in the housing finance system," he wrote in a letter to members of Congress.
The proposed GAO review would come as the mortgage insurance industry is being squeezed on all sides.
Private mortgage insurance covers the default risk on low-down-payment home loans. Fannie and Freddie cannot buy loans for more than 80% of a home's purchase price without some kind of credit enhancement.
This year Fannie and Freddie reduced coverage requirements and gave some borrowers the option to buy even less insurance in exchange for a delivery fee that could be paid up-front or incorporated into the loan's interest rate.
Since then, the two government-sponsored enterprises have been at loggerheads with insurers. The insurers charged that the delivery fee amounts to an insurance premium and that Fannie and Freddie are trying to take profits away from private companies.
But the new structures are not the only alternatives to traditional coverage. In recent years insurers have also lost ground to the piggyback loan, which uses a second mortgage in lieu of insurance.
And last year Freddie Mac issued a derivative instrument called Moderns, which transferred the credit risk on $140 million of mortgages to investors. Though those loans were also covered by private insurance, observers said the deal demonstrated yet another alternative to traditional credit enhancement.
The Mortgage Insurance Companies of America said it supports Rep. Hansen's proposal because a GAO study would demonstrate the value of mortgage insurance to taxpayers and homebuyers.
In an internal memorandum, Mica said the proposed study would also give insurers an opportunity to make the case that Fannie and Freddie's insurance plans "circumvent the cancellation law."
This law requires insurers to cancel policies automatically once a borrower's equity in a home has reached 22%, and to cancel upon request for borrowers who have built up 20% equity. Unlike insurance premiums, the delivery fees in the GSEs' structures may not be canceled, Mica noted.
A Freddie Mac spokeswoman dismissed that argument, saying consumers save more even if they pay the delivery fee.
Rep. Hansen, who introduced the cancellation bill in the House in 1997, sits on no committee that deals with housing or finance. The bill became law only after then-Senate Banking Committee Chairman Alfonse D'Amato lent his support.
Thomas McCool, the GAO's director of financial institutions and market issues, said his agency gives greater priority to requests from chairmen and ranking members of relevant committees. Nonranking members of such committees are next in line.
