Scotsman Guide 10/4/16 – “Small lender groups split on deeper cover PMI”

Small lender groups split on deeper cover PMI

Two small lender trade associations and frequent allies on issues related to housing finance reform have split on the idea of expanding the use of private mortgage insurers to cover the default risk of the nation’s most popular loan types.

The Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America (CMLA) disagree on whether it is a good idea to allow the private mortgage insurers to take on the lion’s share of the default risk on loans purchased by Fannie Mae and Freddie Mac.

Mortgage insurers already cover up to 35 percent of the default risk for GSE loans, when the loan balance is equal or more than 80 percent of the home’s value. The industry has suggested increasing that coverage level to 50 percent of the loan value, so-called deeper coverage.

Upfront risk sharing, where the loan is de-risked before it is purchased and securitized by the GSEs, has been a contentious issue in the mortgage industry. CHLA and CMLA are both worried that new risk sharing models will be used as a tool by the big banks to gain a price advantage that will enable them to sell cheaper mortgages to consumers.

Fannie and Freddie have been transferring most of the default risk to private companies through the sales of securities in so-called “back-end” deals. The government has directed the GSEs, however, to investigate methods to de-risk a portion of the loan on the front end. One of the leading options would be to share the risk at the loan level, with insurers covering more of the risk. Another option would have a lender retain a portion of the risk, then pool the risk from numerous loans and auction it off.

In a recent letter to Fannie and Freddie’s regulator, CHLA said its small and mid-sized nonbank members once supported a greater role for private insurers, but now oppose the idea, because FHFA and Congress have not adequately protected the smaller lenders from price discrimination, and guaranteed pricing transparency and that insurers will serve all lenders.

CHLA said it could support the idea of a greater role for insurers if its members were assured that big banks and other large lender wouldn’t get a cut rate from insurers based on their higher loan volumes, but recent proposals by Congress have not provided that guarantee. CHLA is “withdrawing its support for this approach,” the letter says.

CHLA Executive Director Scott Olson emphasized, however, that the organization prefers the idea of deeper mortgage coverage to other front-end risk sharing models.

“We could support that, but we need protections against volume discounts,” Olson told Scotsman Guide News. “The letter basically says that we would need protections, and we laid them out.”

Meanwhile, CMLA indicated in a letter this week that it does support an expanded role for private insurers, but also wants guarantees that small lenders won’t face price and credit discrimination.

The CHLA and CMLA letters were directed to the GSE regulator Federal Housing Finance Agency, which recently sought input on front-end risk sharing.

In its letter, CHLA says that it still prefers that Fannie and Freddie exclusively use back-end deals to transfer risk, whereas CMLA’s letter says it supports the idea of front-end risk sharing with conditions.

Contact Victor Whitman at (425) 984-6017 or

CHLA in the News