A key U.S. House of Representatives lawmaker questioned whether the regulatory structure governing private mortgage insurers should be changed so the industry shoulders more risk from failing loans.
Policy makers should review whether private mortgage insurers should take a hit from loss mitigation efforts to prevent foreclosures, Rep. Paul Kanjorski (D., Pa.) said Thursday in opening remarks at a hearing on reforming housing finance.
Mortgage insurers only pay claims when a home is foreclosed, but don't absorb losses when a loan is restructured to prevent foreclosure.
"Mortgage insurers exist to provide a first level of protection against losses and should not evade their responsibilities by contractual technicalities," argued Kanjorski, who heads the House Financial Services Subcommittee on Capital Markets, which held the hearing. "We must review this arrangement."
In addition, Kanjorski suggested lawmakers consider changes to the charters of Fannie Mae (FNMA) and Freddie Mac (FMCC) relating to the mortgage companies' credit enhancement requirements. The companies require mortgages with loan-to-value ratios greater than 80% to be covered by private mortgage insurance. Kanjorski noted that U.S. mortgage insurance policies guarantee 20% to 30% of the loan principal amount, while policies in Australia cover 100% of the loan amount.
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