American International Group Inc. is holding out as rival mortgage insurers accept policy changes that support the U.S. government push to stoke refinancing among borrowers with little or no home equity.
The bailed-out insurer’s United Guaranty unit is telling lenders it’s unwilling to offer the same protections on defective loans that competitors are granting to aid the Home Affordable Refinance Program, said four people with knowledge of the discussions. MGIC Investment Corp. and Radian Group Inc. have said they will forfeit some rights to revoke coverage under a plan that gets borrowers into less expensive loans.
President Barack Obama has said expanding the HARP program will make cheaper credit available to more homeowners at a time when mortgage rates are near record lows. The planned changes may also limit banks’ losses on loans that Fannie Mae, Freddie Mac or insurers say were poorly underwritten.
“The real issue here is that some of the lenders with fraudulent or poorly documented or undocumented mortgages want to use the HARP program to relieve themselves of the risk tied to their bad lending decisions,” Mark Herr, a spokesman of New York-based AIG, said in an e-mailed statement.
HARP covers loans already guaranteed by government-supported Fannie Mae and Freddie Mac, which may detail adjustments to the program as soon as today. The mortgage finance companies have protection against some losses under insurance sold by firms including United Guaranty.
Obama highlighted an expansion of the program on Oct. 24, saying it can help the economy move past the worst housing slump since the 1930s without relying on an “increasingly dysfunctional Congress.”
With the U.S. Treasury Department owning most of AIG, “it’s surprising that they’d be the ones not on board,” said Cliff Rossi, executive-in-residence at the University of Maryland’s Robert H. Smith School of Business. Matt Anderson, a Treasury Department spokesman, declined to comment.
The refinancing program, which began in 2009, has reached less than one quarter of homeowners that Obama initially projected. While United Guaranty has been an “industry leader” on HARP, facilitating $3.4 billion of refinancing, it doesn’t want to be part of “a back-door bailout” of banks, Herr said.
Mortgage insurers cut claims costs by voiding policies for errors including inflated appraisals or borrower incomes. The AIG unit benefited from $584 million of denied claims and rescinded coverage in its first-lien business in the nine months through Sept. 30, according to regulatory filings. Rescissions can hurt lenders rather than Fannie Mae and Freddie Mac because originators must buy back loans when insurance is canceled.
AIG’s rivals are generally agreeing, when dealing with HARP loans, to waive rights to void coverage for most types of underwriting mistakes on borrowers’ original loans, said two of the people, who declined to be identified because the talks are private. The companies may also accept limits on the vetting of the new loans, even when homeowners add closing costs to balances, they said.
Fannie Mae and Freddie Mac are willing to have less power to force home-loan repurchases in an effort to aid housing through HARP as lenders also offer concessions, said Joe Pigg, vice president for the American Bankers Association.
“Everybody is being asked to do their part, so it seems to me the mortgage insurance companies need to step up and do their part,” Pigg said in a telephone interview. “If they don’t, that will be an inhibiting factor, hurting borrowers.”
United Guaranty provides insurance on about $88 billion of Fannie Mae and Freddie Mac loans, the fourth-most, according to securities filings. It was the largest mortgage insurer by policy sales last quarter, followed by Radian and MGIC, according to newsletter Inside Mortgage Finance.
Under their government charters, Fannie Mae and Freddie Mac normally must have borrowers buy mortgage insurance if they take out loans exceeding 80 percent of a home’s value. HARP waives the requirement when refinancing loans that didn’t need insurance at origination. The program also can allow existing coverage to roll over at the same cost when borrowers replace their debt and insurers agree.
About 900,000 loans have been refinanced under HARP, according to the Federal Housing Finance Agency, the independent regulator of Fannie Mae and Freddie Mac that says the volume may double by the end of 2013. Obama said the program would aid 4 million to 5 million as the initiative was introduced.
FHFA Acting Director Edward DeMarco told reporters last month that Fannie Mae and Freddie Mac would offer “substantial” relief from buyback demands when HARP is used, without providing “absolute” waivers, citing instances of fraud as an exception. Corinne Russell, an FHFA spokeswoman, declined to comment.
Allowing banks to use HARP to lessen repurchase risk tied to so-called representations and warranties on previously issued mortgages may help fuel refinancing by pushing lenders to prioritize the program, Sandipan Deb, an analyst at Barclays Capital, said in an Oct. 24 interview.
“Typically, such defects show up in the first few years of a mortgage and so the value of the reps and warrants decline over time,” the FHFA said in a document on its website. “By refinancing into a lower interest rate and/or shorter term mortgage, these borrowers are recommitting to their mortgage and strengthening their household balance sheet.”
‘Good for Everybody’
MGIC is ready to accept lessened rights to rescind policies since “it’s good for everybody because it puts the borrower in a better position to service their debt,” said Mike Zimmerman, its investor-relations head. Milwaukee, Wisconsin-based MGIC’s mortgage-insurance unit has the most Fannie Mae and Freddie Mac policies outstanding.
MGIC, which plans to “line up” with the two companies’ repurchase procedures, also will drop a fee of 0.5 percentage point that it has charged to allow a new lender to refinance a homeowner under HARP without taking on rescission risk stemming from the original mortgage, Zimmerman said. One reason that repurchase and rescission rights are being limited is that they have helped to “restrict” borrowers to their current lenders, David Stevens, head of the Mortgage Bankers Association, said.
Radian expects borrowers will be about 50 percent to 70 percent less likely to default after a HARP refinancing lowers their rates, said Teresa Bryce Bazemore, president of the Philadelphia-based firm’s mortgage-insurance unit.
Lessening rescission rights to help achieve that outcome is “in our best interest,” partly because Radian must set aside reserves when loans default, draining capital, even if the insurer expects to reject the claim later, she said in a telephone interview.
The Washington-based Mortgage Insurance Companies of America said in a statement last month that its four members planned to “relieve lending institutions of representations from the original loan files.” Members are Radian, MGIC and Old Republic International Corp. and Genworth Financial Inc. units.
“The MI companies waiving their reps and warranties are worried about upsetting their lender relationships,” said Herr, AIG’s spokesman. “We’re worried about assuming someone else’s fraud or negligence.”
United Guaranty’s third-quarter operating loss narrowed to $96 million from $124 million a year earlier. AIG, whose 2008 bailout after bad bets on mortgage securities reached $182.3 billion, is now 77 percent owned by the U.S., down from 92 percent before a May share sale.
The housing crash has pressured all mortgage insurers, with PMI Group Inc., once the third-largest, having its main unit seized by Arizona regulators last month.
The state “has agreed to allow PMI to continue to fully participate in HARP and also to permit PMI to release lenders from representations and warranties on the original loan for eligible HARP refinances,” Erin Klug, a spokeswoman for its insurance department, said in an e-mail.