Freddie Mac alters rules for private insurers

Freddie Mac alters rules for private insurers

By Stacy-Marie Ishmael in New York

Published: February 14 2008 19:06 | Last updated: February 14 2008 19:06

Freddie Mac, the government-sponsored mortgage financier, said on Thursday it had changed some of its rules relating to private mortgage insurers in a bid to support the troubled sector.

Private mortgage insurance provides cover in the event of a homeowner default, and is typically required if the initial downpayment is less than 20 per cent of the value of the loan.

Without such insurance, Freddie Mac and its counterpart Fannie Mae would be unable to buy the loans.

The mortgage insurance sector has been badly hit by the crisis in the US housing market, which has led to record payouts and historic losses at the major insurers – Radian, PMI and MGIC.

“We’re trying to help the mortgage insurers,’’ Freddie Mac said.

The lender will change its rules on so-called captive reinsurance deals, in which the mortgage insurer gives a portion of its premiums to a special trust set up to share the risk of losses on loans.

As of June 1 this year, Freddie will require mortgage insurers to retain more of their premiums to pay current claims and rebuild their capital base, the lender said. Freddie will also be prepared to accept policies written by lower-rated insurers whose claims-paying ability is less certain.

Previously, an insurer that was downgraded below AA- would not have been eligible to write policies for Freddie. Under the new rules, a downgraded insurer might be able to retain its eligibility if Freddie approves its “remediation plan”, which must be submitted within 90 days of the downgrade.

Freddie reserved the right to impose further restrictions on lower-rated insurers.

The move will force Freddie to increase its own loan-loss reserves, since the risk of a payment default by lower-rated insurance companies is higher, analysts said.