A mortgage insurance product known as GSE pool insurance has come under fire from critics who warn that the insurers may be taking too much risk.
The insurance is written for loans sold to the government-sponsored entities that purchase mortgages-Fannie Mae, formally the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp. Critics say the insurers are going after business too aggressively. As a result, they say, the insurers are pricing the product too inexpensively to offset their risks.
MGIC Investment Corp. and CMAC Investment Corp. began offering the product to lenders late last year.
Steve Smith, executive vice president of marketing and field operations for PMI Group, San Francisco, pointed out that in the early 1990s mortgage insurers experienced underwriting losses totaling about $1 billion on pools of jumbo loans originated primarily in California and the Northeast. Those loans soured when real estate values plunged. PMI stopped issuing pool insurance in 1993.
Frank P. Filipps, president and chief executive officer of CMAC, Philadelphia, said his company is writing profitable GSE pool insurance policies that are not as risky as the pools in the early 1990s.
The risk in the GSE pools is not nearly as great as with the jumbo loans, Mr. Filipps said, because they consist of 30-year, fixed-rate conventional loans from various regions. Still, critics estimate the insurers could lose $100 million to $150 million in a downturn.
They also contend that similar mistakes are being made.
Gerald Friedman, chairman of Chicago-based Amerin Guaranty Corp., said the companies writing these policies want to avoid losing business to other products such as captive reinsurance.
With captive reinsurance, lenders set up companies to reinsure loans and, in turn, receive some of the premiums from the mortgage insurer. But as Mr. Friedman points out, the lender also has to assume some of the risk. Amerin has not written any GSE pool policies to date.
Edwin Ciskowski, an analyst for Milwaukee-based Cleary Gull Reiland & McDevitt, conceded that the GSE insurance pool product is being priced at a discount to attract lenders. But he insisted that the companies selling this product are not irrationally pricing it.
"Is the mortgage insurance business going to hell in a handbasket tomorrow because of this? Not even close," he said.