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(1) What is private mortgage insurance?
Private mortgage insurance (PMI) protects a lender against loss if the borrower defaults on his or her mortgage loan. PMI premiums may be paid by the borrower, the lender or the investor.
(2) How is mortgage insurance related to the business of Fannie Mae and Freddie Mac?
When Fannie Mae and Freddie Mac (the Enterprises) purchase one- to four-unit single-family mortgage loans where the outstanding principal balance of the mortgage exceeds 80 percent of the value of the property securing the mortgage (i.e., a loan-to-value ratio greater than 80 percent), they are obligated by their charters to obtain an acceptable form of credit enhancement for the mortgage. Mortgage insurance offered by an "Approved Insurer," as determined by Fannie Mae or Freddie Mac, is the most typical form of acceptable credit enhancement.
(3) Why are Fannie Mae and Freddie Mac revising their eligibility requirements now?
Fannie Mae and Freddie Mac suffered significant losses during the recent financial crisis, including losses suffered when mortgage insurance companies became unable to fully pay claims. FHFA has required Fannie Mae and Freddie Mac to strengthen their existing counterparty risk management policies to manage the potential risk exposure to effectively ensure their mortgage insurance counterparties are able to fulfill their intended role of providing reliable credit enhancement to Enterprise loans even in adverse market conditions.
Each Enterprise currently has its own set of eligibility requirements that mortgage insurers must satisfy to obtain and maintain "Approved Insurer" status. Updating private mortgage insurer eligibility requirements (PMIERs) and aligning them for both Fannie Mae and Freddie Mac is a key component of FHFA's 2014 Scorecard and Strategic Plan. Finalizing mortgage insurance master policies (as announced by Fannie Mae and Freddie Mac on June 24, 2014, becoming effective October 1, 2014) and revising mortgage insurer eligibility requirements are part of a broader, multi-year effort to strengthen mortgage insurance counterparty standards. These efforts are intended, in part, to ensure that "Approved Insurers" are able to fulfill their role of providing private capital even in times of market stress.
(4) Who would the draft eligibility requirements apply to?
The draft requirements are intended solely for private mortgage insurance companies that wish to obtain or maintain "Approved Insurer" status with either Enterprise. They set the standards and guidelines that an "Approved Insurer" must meet and maintain in order to provide mortgage insurance on loans owned or securitized by an Enterprise.
(5) What is the expected impact from these draft eligibility requirements for "Approved Insurers"?
The draft eligibility requirements include business requirements governing the relationship between the Enterprises and "Approved Insurers" designed to ensure that "Approved Insurers" operate under uniform guidelines, such as claim processing timelines, that can help reduce costs for the Enterprises.
The draft eligibility requirements include quality control requirements designed to ensure that "Approved Insurers" have a strong internal risk management infrastructure that emphasizes continuous process improvement and senior management oversight. They include things such as robust documentation of procedures and independence of the quality control function.
The draft eligibility requirements include financial requirements that aim to bolster the financial standing of "Approved Insurers" in cycles of high defaults and help ensure they can meet their obligations in times of economic stress. "Approved Insurers" will have several options to comply with the financial requirements, including but not limited to raising capital, entering into reinsurance contracts and replacing illiquid assets with liquid assets. "Approved Insurers" that do not fully comply with the revised financial requirements on the effective date will be given a transition period of up to two years. In no instance would a transition period extend beyond two years from the publication date of the finalized PMIERs
(6) How will the draft eligibility requirements impact the entry of new mortgage insurers into the market?
The draft eligibility requirements aim to ensure that "Approved Insurers" possess the financial and operational capacity to be strong counterparties to Fannie Mae and Freddie Mac. They have also been designed so that newly "Approved Insurers" insure certain types of loan products consistent with their industry experience, company size and scale. As time passes and a proven track record is developed, newly "Approved Insurers" will have the ability to expand their scope of business with Fannie Mae and Freddie Mac.
(7) What is the expected impact from these draft eligibility requirements for consumers?
The draft mortgage insurance eligibility requirements are designed to reduce taxpayer risk by strengthening the role of private insurance in the mortgage market. We anticipate sufficient industry capacity to meet the needs of high-LTV borrowers and are seeking input on the potential impact of these draft requirements.
(8) How were the draft eligibility requirements developed?
Each Enterprise currently has its own set of eligibility requirements that mortgage insurance companies must satisfy to obtain and maintain "Approved Insurer" status. FHFA, in its role as Conservator of the Enterprises, directed Fannie Mae and Freddie Mac to revise, align and strengthen their existing eligibility requirements. Fannie Mae and Freddie Mac, at FHFA's direction and subject to its oversight, developed the draft eligibility requirements. There has also been consultation with state insurance commissioners as well as private mortgage insurers that currently are approved to do business with Fannie Mae or Freddie Mac. The request for input from the public is the next step in the process of updating these requirements.
(9) When will these draft eligibility requirements take effect?
Once finalized by Fannie Mae and Freddie Mac, the eligibility requirements would become effective 180 days after the publication date. "Approved Insurers" must fully comply with all components of the PMIERs on the effective date. "Approved Insurers" that do not fully comply with the financial requirements on the effective date would be given a transition period of up to two years to fully comply. In no instance would a transition period extend beyond two years from the publication date of the finalized PMIERs
(10) Under what authority are FHFA, Fannie Mae and Freddie Mac taking this action?
The Enterprises' charter acts allow each Enterprise to determine whether a mortgage insurer is qualified to insure loans purchased by that Enterprise. Fannie Mae and Freddie Mac each currently have their own set of eligibility requirements that have not been updated since 2003 and 2008, respectively.
As Conservator of Fannie Mae and Freddie Mac, FHFA is obligated by statute to preserve and conserve their assets and to ensure that the two companies operate in a safe and sound manner. Directing Fannie Mae and Freddie Mac to update, align and strengthen their eligibility requirements for "Approved Insurers" is consistent with these obligations and will mitigate their potential exposure to losses that may arise from future financial downturns, thereby protecting taxpayers and reducing risk, key goals of the 2014 Scorecard and Strategic Plan.
(11) Do these draft eligibility requirements affect the ability of state insurance regulators to regulate mortgage insurers?
No. The state insurance commissioner or department in the state in which the company is domiciled, as well as states where the company is licensed to do business, regulate mortgage insurers. These draft eligibility requirements are designed to allow Fannie Mae and Freddie Mac to manage their counterparty relationships with their "Approved Insurers" effectively and consistently, and reduce taxpayer risk exposure. The draft eligibility requirements do not limit or affect the ability of state insurance commissioners to regulate "Approved Insurers" licensed in their state. These draft requirements do not displace state laws and regulations.
(12) How are these draft eligibility requirements different from the current business practices of Fannie Mae and Freddie Mac?
The draft eligibility requirements are more specific and clear than those in each Enterprise's existing requirements. For instance, the draft financial requirements focus on a risk-based evaluation of each "Approved Insurer's" portfolio measured against the liquid capital investments that would be necessary to pay claims under a scenario of significant market stress. The existing financial requirements are less specific, focusing instead on business scope, compliance with state law, reliance on ratings given by nationally recognized ratings agencies and other non-specific financial metrics.
(13) What does the White Paper on FHFA Mortgage Analytics Platform have to do with the draft eligibility requirements?
The Platform supports FHFA's strategic plan and is one of the tools FHFA uses in policy analysis. In the case of the draft eligibility requirements, FHFA used the platform to project remaining life of coverage claims on Enterprise loans with mortgage insurance. The projected claims were disaggregated into segments based on vintage, credit score, and LTV. The risk based required asset factors in Exhibit A were calculated as the projected claims in each segment divided by the risk-in-force for that segment. A description of the platform is available at FHFA Mortgage Analytics Platform.
Corinne Russell (202) 649-3032 / Stefanie Johnson (202) 649-3030
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