Although lenders are opposing Freddie Mac's recent decision to increase mortgage insurance coverage requirements, the new mandates may also provide it with the ability to provide more programs that until recently may have been too risky.
Freddie's new standards, which are outlined in its Sept. 15 Bulletin, No. 94-11, will require its sellers to ensure mortgage insurance for originations with loan-to-value ratios greater than 90% be set at 30%, up from previous Solo requirement. Loans with LTVs greater than 85% but less than or equal to 90% will require 25% coverage, and mortgages with LTVs greater than 80% but less than or equal to 85% will remain at 12%.
Freddie also plans to decrease coverage requirements for fixed-rate mortgages with 15- and 20-year terms to accurately reflect the faster amortization and reduced risk of default associated with those products. But higher coverages will be required for both 15-and 20-year mortgages and high LTV mortgages insured by the Amerin Guaranty Insurance Corp. (see chart, Page 2)
Freddie's decision raised a hailstorm of public dissent, but the higher coverage ratios gives the GSE the opportunity to offer more innovative products, at least that's the hopes of mortgage bankers. "If they're getting better protection from insurance, they might feel adequately covered and be willing to experiment more - maybe [Freddie] will do a 97% loan," said Vicky Vidal, a Freddie Mac laision with the MBA. However, those high LTV loans were the reason for Freddie's policy change in the first place.
"Higher [LTV] ratio mortgages currently constitute a substantially larger percentage of Freddie Mac purchases than in prior years," said Michael Stamper, executive vice president of Freddie's risk management division. "This has increased the risk profile of our portfolio."
Stamper said Freddie considered several options before making a decision. However, based upon discussions with lenders, it decided that increasing the mortgage insurance coverage would be the most effective means of managing increased levels of risk while maintaining the flow of mortgage funds.
But while Freddie said it based part of its decision on discussions with lenders, the move nonetheless surprised many lenders attending the Eastern Secondary Mortgage Market Conference in Raleigh, N.C., Sept. 19 to 20. Some said they were concerned about what the increased closing costs would mean to business.
Freddie and Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight, said it was aware of the mortgage insurance coverage increase, but declined to involve itself in either GSE's business decisions. In this instance, some mortgage bankers probably wish they would.
"Mortgage bankers that sell to Freddie exclusively may see a decline in business," said Vincent Muratore, president of First Bankers Mortgage Services, a Fort Lauderdale, Fla.-based mortgage bank. Muratore, one of many conference attendees surprised by Freddie's move, said the deepened coverage wouldn't have a significant impact oil his business because First Bankers, deals mostly with Ginnie Mae.
Freddie downplayed the effect the deeper coverage requirements would have on home buyers. And while the new requirements - which take effect for mortgages delivered on or after Oct. 1 - will increase closing costs for home buyers, the impact will be minimal and most increases won't exceed $10 a month.
One group not surprised by Freddie's move was the Mortgage Guaranty Insurance Corp. "We,re in a constant dialogue with [the GSEs] regarding coverages," said Robert E. Tenges, MGIC's senior vice president of business development, who was also attending the conference. "And we've been expecting for some time that there might be deeper coverage requirements." Tenges said Freddie's loss experiences over the last 24 months most likely spurred the policy change.
Tenges said Fannie was considering even higher mortgage insurance requirements, possibly as high 35% on 90% or more LTVs. "But Freddie's move might make them revisit that decision," he said. "And they'll probably be very close to Freddie's [new levels]."
The Mortgage Bankers Association said it understood Freddie's risk management goal, but was concerned that it would decrease the ability to qualify home buyers.
"That's a lot of increases in a year," said Vicky Vidal, a Freddie liaison with the MBA. Vidal, who spoke of the first mortgage insurance coverage increase Freddie mandated in January. With so many lenders concerned about affordable housing, Freddie might be creating a situation where some home buyers become ineligible.
Mortgage lenders may also have to be concerned with requirements in the nonconforming, private-label market because that industry has traditionally mirrored the GSEs.