Lawmaker Seeks Calif. Probe of GSE Pool Insurance

Lenders are reaping the benefits of a new form of mortgage insurance and failing to pass along the savings to consumers, a California state assemblyman has charged.

At issue is GSE pool insurance, one of a series of products introduced recently by mortgage insurers to share profits with lenders, whose margins are shrinking.

Pool insurance enables mortgage lenders to negotiate lower guarantee fees from Fannie Mae and Freddie Mac, the government sponsored enterprises that buy mortgages. Lenders are under increased pressure to make more low- down-payment loans, but the agencies will buy the loans only if they are insured.

Assemblyman Bill Morrow said lenders are saving as much as $1,500 per loan because of the new product. He has asked the state insurance commissioner to probe whether lenders' failure to pass along the savings violates state kickback laws or the federal Real Estate Settlement Procedures Act.

"If any money can be saved in the closing costs, all of it should go directly to the consumer. And that should definitely be the case where a federally chartered agency such as Freddie Mac is involved," the Oceanside Republican said.

The complaint in California is just the latest against the new breed of insurance products designed to pass along insurance profits to lenders. New York insurance authorities are investigating another such product, captive reinsurance, to determine whether lenders are actually assuming risk.

Some mortgage insurers sell Freddie and Fannie partial coverage of low- down-payment pools for as little as $1 per mortgage, Assemblyman Morrow said.

The partial coverage lets Freddie and Fannie reduce the guarantee fees they charge to lenders that sell the pools. Insurers hope those lenders will bring them more profitable primary mortgage insurance business, the assemblyman said.

A spokeswoman for Freddie Mac said that it has structured pool deals to save costs for lenders, and that lenders should pass along the savings to consumers. Another industry observer, who asked not to be named, insisted lenders have been doing just that.

Sources said there has already been a decline in pool insurance since Standard & Poor's announced in June that it would levy higher capital charges on insurers offering GSE pool. S&P said it did so because the pricing on many of the deals was too low to cover the risk.

MGIC Investment Corp. and CMAC Investment Corp. have been writing GSE pool insurance. PMI Group is said to be considering it.

Geoffrey Cooper, a spokesman for MGIC, said it does not tie agency business to primary insurance. He denied that GSE pool insurance is a loss leader.

"We aren't pricing it to lose money," he said. "The pool product standing alone is going to be profitable."

Darryl W. Thompson, chief executive officer of another mortgage insurer, Triad Guaranty, said it has done no GSE pool deals, because the prices are so low.

Lenders in pool deals have an "unspoken commitment" to give more primary insurance business to the insurers involved, Mr. Thompson said. Such agreements violate the settlement procedures act, he said, so they are not written down.

Mr. Thompson said Freddie Mac is still purchasing loans insured with GSE pool insurance, and that Fannie Mae has reluctantly done such deals, for competitive reasons.

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