people with less than stellar credit histories. The company told analysts recently that it would start insuring A-minus loans. Although insurers have written coverage for pools of loans that include some A-minus loans, this is the first instance in which a mortgage insurer has specifically targeted the A-minus loan market. Borrowers with an A-minus credit rating are those who have had some delinquency problems in recent years but not enough to designate them as B and C, or subprime, borrowers. Mortgage insurers cover the risk of default on low-down-payment loans for portfolio lenders and Fannie Mae and Freddie Mac, the government sponsored enterprises that buy mortgages. Without mortgage insurance, Fannie Mae and Freddie Mac will not buy loans with a down payment less than 20%. But as the use of credit scoring has become more prevalent in the mortgage industry, Fannie Mae and Freddie Mac have widened the spectrum of loans they will buy. Frank P. Filipps, chief executive officer of CMAC, said many of the A- minus loans that CMAC insures will meet Fannie and Freddie's guidelines for purchase. "Scoring has redefined for every company what an A-minus loan and an A loan is," said an executive with another mortgage insurance company. The eight private mortgage insurance companies also compete with the federal government, which insures loans through the FHA program of the Department of Housing and Urban Development. Edwin Ciskowski, an analyst with Equitable Securities Corp. in Nashville, said that CMAC is going after business that normally would go to the FHA program, which typically has been more willing to insure lower- credit-quality loans than private mortgage insurers. Mr. Ciskowski said he is "cautiously optimistic" that CMAC will be able to manage the increased risk. He said that A-minus loan insurance should not represent a sizable portion of CMAC's business, and that the company will price these policies to offset the risk of loss from default. Steven Schwartz, an analyst with ABN Amro/Chicago Corp., said CMAC's decision is another example of the industry's move toward risk-based pricing. He said usually the mortgage insurance industry has had the mentality that "an A is an A is an A, even though there is undoubtedly a gradation." But last year, Mr. Schwartz noted, both CMAC and Triad Guaranty Inc. began offering discounts to lenders on the loans that had the best credit scores. Mr. Schwartz predicted other insurers will follow CMAC's lead. "If CMAC does it profitably, then why not? There is nothing implicitly wrong with taking an A-minus loan if you can properly price it," he said. Mr. Filipps said CMAC has taken a small step down the credit spectrum, but won't venture into the riskier B and C loan market. Fannie Mae and Freddie Mac still won't buy these loans, he said.
Access to authoritative analysis and perspective and our data-driven report series.
No credit card required. Complete access to articles, breaking news and industry data.
Have an account? Sign In