U.S. Regulator Sees Future Role for Mortgage Insurance Industry

The main regulator for Fannie Mae and Freddie Mac Thursday said he sees a future for mortgage insurance companies that underwrite many loans for the two mortgage finance giants.

“They’re very important,” James Lockhart, chief of the Federal Housing Finance Agency, told reporters. “I’m a strong believer in the private market. The idea of some risk sharing with the private market makes a lot of sense. The second-underwriting that they do makes a lot of sense.”

A key business for mortgage insurers like PMI Group , Radian Group Inc. and Genworth Financial Inc. is to protect Fannie Mae and Freddie Mac from the costs of defaulting home loans. Companies specializing in that business have been strained by the housing downturn and record foreclosures.

Lockhart, who spoke to reporters after addressing a conference of the Association of Government Accountants, said he would like to see mortgage insurance companies receive a capital injection under Washington’s financial market rescue plan. His voice, however, is just one among policy-makers debating how to stabilize financial markets without burdening taxpayers with more costly bailouts.

“The right step is to get them some more capital so they can get back in the game,” Lockhart said.

On Wednesday, President Barack Obama unveiled a plan to use $275 billion in federal cash to save millions of homeowners from foreclosure and help millions more refinance into a cheaper loan.

Housing industry leaders generally welcomed the Obama plan but the multi-pronged rescue package does not cut through complicated investor contracts that make it difficult to rewrite troubled loans.

Lockhart said that those contracts are still an obstacle to modifying loans but that many investors who hold a junior stake in failing mortgage investments are throwing in the towel.

“Most of the second liens aren’t worth a lot. What we’re seeing is them bought out for a relatively small amount of money,” Lockhart said.

According to their founding charters, Fannie Mae and Freddie Mac are prohibited from backing more than 80 percent of a home loan. Mortgage insurers and second-lien investors may cover that additional 20 percent of potential losses and allow the companies to invest.

Record defaults are taking a toll on those second-lien investors and insurers.

Under one rescue program announced this week, Fannie Mae and Freddie Mac may refinance up to 105 percent of some loans that have lost value during the two-year-old housing crisis.

“We have told Fannie and Freddie that they have to make their best efforts to get the mortgage insurance rolled over onto the new mortgage,” Lockhart said. “We think that’s important and we’re going to be talking to the mortgage insurers about that.”

(Editing by James Dalgleish)