The launch of the mortgage credit risk transfer program Integrated Mortgage Insurance, IMAGIN, has provoked a backlash statement from U.S. Mortgage Insurers (USMI) President and Executive Director, Lindsey Johnson, who voiced concerns over the programme’s potential to bypass the mortgage insurance industry to purchase credit enhancement from what she calls less regulated entities.
“We believe that the IMAGIN pilot violates the spirit of the Congressional charter for Freddie Mac and represents a significant blurring of the bright line separation between primary market and secondary market activities.
“Because MI selection is currently handled by the lender as part of the primary market process, the IMAGIN program sets a precedent of allowing the GSEs to participate in primary market activities while also putting the taxpayer at greater risk by circumventing the high capital and regulatory standards that MIs are held to today.”
In addition, she says the IMAGIN programme could create a conflict of interest between the government sponsored enterprise, Freddie Mac’s role of imposing Private Mortgage Insurers Eligibility Requirements (PMIER) standards on private MIs and then “designing a program that relies on less regulated (and in turn less expensive) reinsurers to circumvent these standards.”
She cites additional concerns over its “lack of sustainability,” stating that MIs provide capital that is permanently committed to the sector while relying on an uncommitted panel of reinsurers could leave the mortgage finance industry and taxpayers exposed.
However, state-sponsored Freddie Mac states that it aims to make home ownership and rental housing more accessible through finding the most affordable solutions, bringing capital to the housing market by purchasing mortgage loans from lenders to provide liquidity and stability to the U.S. housing market.
Therefore the IMAGIN pilot, in which Arch Capital positions itself as an intermediary to channel mortgage credit and insurance related risks back to a panel of reinsurers, could further Freddie Mac’s agenda in making mortgage loans affordable and secure for consumers, offering a scalable platform that allows for capacity from highly rated global players to be accessed for the U.S. housing market.
The IMAGIN model could ultimately mean the most efficient capacity ends up backing mortgage risks, which would be a positive for the consumer. But it’s understandable that this model, which could bypass some of the primary mortgage insurance market altogether, would receive some negative feedback.
Johnson urged government sponsored enterprises to explore further options for private mortgage insurance with the MI industry, arguing that mortgage insurers had proven their ability to distribute risk through capital raised in the equity and debt markets and through tapping investors in the capital and reinsurance markets.
“A deep MI pilot built around the core strengths of the MI industry, lender relationships, independent underwriting standards, and expertise in pricing long tailed credit risk, combined with Credit Risk Transfer via the capital and reinsurance markets by MI companies, can better protect the U.S. taxpayer while also providing prudent access to home ownership,” said Johnson.
That’s true, but are additional steps needed in the value chain or would the fastest and most efficient route for mortgage risks to get to reinsurance capital be the mechanism that benefits consumers the most?
