Fannie Mae Warns Servicers on Mortgage Insurance Agreements
Fannie Mae, the government-owned finance company, told mortgage servicers to halt a practice that could help them avoid repurchasing flawed home loans.
In a notice to banks today, the company said servicers are prohibited from entering into loss-sharing or indemnification agreements with mortgage insurers. The deals help servicers avoid having their policies revoked.
The arrangements “compromise mortgage insurance coverage” and are “generally inconsistent with protecting Fannie Mae’s interests in mortgage loans,” the Washington-based company said in its notice. Fannie Mae’s smaller rival, Freddie Mac of McLean, Virginia, sent a similar warning on April 1.
Fannie Mae and Freddie Mac, which are operating under federal conservatorship, rely on mortgage insurers to help ferret out bad loans. When an insurer rescinds a policy, it triggers a loan-repurchase request to the lender from the government-sponsored enterprises.
Companies including Milwaukee-based MGIC Investment Corp. (MTG) sell insurance on home loans, paying lenders if the loans go into default. After three straight years of losses, the $759 billion industry has been investigating more loans for flaws that might allow them to revoke policies.
MGIC said last year it had settled with a lender to halt rescissions in return for a payment.
Freddie Mac and Fannie Mae, which own or guarantee more than half of all U.S. home loans, require lenders to buy insurance on mortgages that have small borrower down payments.
To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
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