Freddie Mac: Lenders Should Retain Risk Rather Than Purchase Mortgage Insurance

In an interview published by National Mortgage News on February 2nd, Freddie Mac Senior Vice President of Credit Risk Transfer Kevin Palmer says the housing finance system would function a lot better if all lenders retained a portion of the risk on loans they service and originate. The comments come as two industry associations are working on proposals for a pilot program that would use private insurance to take mortgage loan-to-value ratios down to 50 percent. Currently, 30 percent of risk transferred on new business is done primarily via mortgage insurance, often providing deeper coverage than what is required by the government sponsored enterprises’ charters.

While Palmer tells National Mortgage News that keeping skin in the game is preferable to mortgage insurance, he notes that doing so is expensive due to Basel rules. According to the Freddie Mac executive, “banks are not interested in taking this risk due to Basel capital rules. That leaves nonbanks. We have done a couple of these transactions, and are looking for ways to expand this to more. Fortunately if we don't come to an agreement with a lender, most all of the risk will flow into one of our other CRT offerings.”

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