Fan­nie’s take on pay­ing for PMI seeks to avoid ‘char­ter creep’ crit­i­cism

A Fan­nie Mae test to han­dle the pri­vate mort­gage insurance process for lenders may raise con­cerns that it’s go­ing out­side the scope of its sec­ondary market mis­sion.

National Mortgage News - - Contents - By Brad Finkel­stein

A Fan­nie Mae test to han­dle the pri­vate mort­gage insurance process for lenders may raise con­cerns about char­ter creep, but the ef­fort re­flects its man­date to ex­plore new credit- risk trans­fer al­ter­na­tives.

Un­der the new front- end risk- shar­ing pro­gram, dubbed “En­ter­prise- Paid Mort­gage Insurance,” Fan­nie Mae will ob­tain and pay the pre­mi­ums on pri­vate mort­gage insurance poli­cies on low down pay­ment mort­gages — though bor­row­ers ul­ti­mately shoul­der the cost through a loan- level price ad­just­ment to their in­ter­est rates.

EPMI shares a num­ber of fea­tures with a Fred­die Mac ini­tia­tive ear­lier this year called In­te­grated Mort­gage Insurance, or IMAGIN. The PMI cov­er­age in both plans carry non­cance­lable, 10-year terms and the poli­cies are is­sued by a panel of rein­sur­ers.

But crit­ics ac­cused Fred­die Mac of en­gag­ing in char­ter creep and threat­en­ing pri­vate cap­i­tal from re- en­ter­ing the mort­gage in­dus­try by par­tic­i­pat­ing in pri­mary market ac­tiv­i­ties.

But the PMI al­ter­na­tive is fair game for the govern­ment-spon­sored en­ter­prises be­cause their con­ser­va­tor, the Fed­eral Hous­ing Fi­nance Agency, has in­structed them to de­velop a va­ri­ety of credit-risk trans­fer struc­tures, said Rob Schae­fer, Fan­nie Mae vice pres­i­dent for credit en­hance­ment strat­egy and man­age­ment.

“FHFA has wanted us to ex­plore dif­fer­ent risk trans­fer struc­tures, mov­ing risk away from Fan­nie Mae and away from tax­pay­ers. This is a con­tin­u­a­tion of that,” Schae­fer said in an ex­clu­sive in­ter­view with NMN.

Both EPMI and IMAGIN are com­pa­ra­ble to lender- paid mort­gage insurance. For some lenders, the cost of EPMI will be an im­prove­ment over what they pay for LPMI, Schae­fer said. But since LPMI is of­ten of­fered on a ne­go­ti­ated price, other lenders won’t get bet­ter pric­ing with EPMI.

Be­tween 10% and 15% of the low down pay­ment mort­gages de­liv­ered to Fan­nie Mae use LPMI.

“No. 1, this is an op­tion for lenders,” he said. “So we’re not go­ing to force any lender to ever use this. If they see this has value, they will con­sider it. If they don’t, no one is go­ing to force them to use this.”

Ad­di­tion­ally, the loan is only un­der­writ­ten once; it does not need to go through a sep­a­rate process to be ap­proved for PMI. Any claims are handed by Fan­nie Mae.

“We’re try­ing to de­velop op­tions for lenders to sim­plify their pro­cesses,” Schae­fer con­tin­ued.

“Both of those are re­ally be­hind our roll- out of the EPMI pilot.”

EPMI also shares sim­i­lar­i­ties with an­other Fan­nie risk- shar­ing prod­uct, called Credit Insurance Risk Trans­fer. They both use a front- end risk- shar­ing struc­ture, with insurance ob­tained when it’s ac­quired by the GSE.

“We have done for­ward struc­tures with CIRT that are re­ally just like this, where we’re get­ting a 12- month for­ward com­mit­ment from the in­sur­ers or MIs,” Schae­fer said.

Dur­ing the pilot phase, Fan­nie Mae is lim­it­ing EPMI to whole loan com­mit­ments. Those whole loans will be pooled later into MBS and will also be cov­ered by Fan­nie Mae’s credit risk trans­fer pro­grams.

In the fu­ture, it could ex­pand the op­tions to in­clude loans de­liv­ered in mort­gage­backed se­cu­rity com­mit­ments.

Fan­nie Mae col­lab­o­rated with lenders and pri­vate mort­gage in­sur­ers to de­velop the struc­ture of EPMI. While pri­vate mort­gage in­sur­ers are not pro­vid­ing the pri­mary cov­er­age on the first EPMIel­i­gi­ble loans, af­fil­i­ates of sev­eral

PMI car­ri­ers are par­tic­i­pat­ing in the rein­sur­ance panel that pro­vides cred­itrisk trans­fer cov­er­age. But Fan­nie Mae may ob­tain the pri­mary cov­er­age from ap­proved PMI car­ri­ers in fu­ture deals, Schae­fer said.

The mort­gage insurance pol­icy will be paid for through a loan- level price ad­just­ment. “We struc­tured it as an LLPA as op­posed to a change in the guar­an­tee fee to make it eas­ier for lenders,” Schae­fer said, ex­plain­ing that some sell­ers might find it more chal­leng­ing to have loans with dif­fer­ent base g-fees to­gether in the same de­liv­ery.

But Fan­nie Mae will look at this over time and if it finds that it is fea­si­ble to han­dle the pay­ment in a dif­fer­ent way, it would con­sider that as well.

The lenders par­tic­i­pat­ing in the pilot re­flect a va­ri­ety of com­pany types and sizes. Fan­nie Mae did not dis­close the par­tic­i­pants, but as loans are ac­quired and the cov­er­age ob­tained, the lenders’ names will be re­leased in the in­for­ma­tion about the trans­ac­tion.

“Small, medium or large, some lenders will like it, some won’t,” ad­ding some lenders may pre­fer to not have to han­dle the op­er­a­tions and ad­min­is­tra­tive re­quire­ments associated with ob­tain­ing and main­tain­ing PMI poli­cies, Schae­fer said. On the other hand, there are lenders of all sizes that are com­fort­able with the cur­rent process.

“I know there’s been a lot of con­cern about this struc­ture and I want to re­it­er­ate this is an op­tion for lenders, they will de­cide whether this has value. This is not meant to force any­body to do this sort of struc­ture or to un­der­mine the MI in­dus­try as we know it,” he said.

“We con­sider the MIs our part­ners, the MIs have been part­ners for us for decades and they’ll con­tinue to be part­ners with us go­ing for­ward. Many lenders will con­tinue to like the way they buy MI now and that’s just fine.”

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