A plan to lower outlays for mortgage insurance Freddie Mac proposal generates infighting

Nation's Housing

October 25, 1998|By Kenneth R. Harney

CONGRESS' fractious rush to adjournment last week obscured intense, behind-the-scenes fighting over an issue that could cut the monthly mortgage costs for millions of homebuyers who pay for private mortgage insurance.

The controversy, certain to generate more attention in 1999, concerns a surprise move by one of the largest mortgage finance sources -- Freddie Mac -- to dispense with traditional mortgage insurance policies on some or all of the low-down-payment mortgages it buys from local lenders. Freddie Mac believes that by using alternative forms of loss protection on its mortgages, it can save borrowers hundreds of millions of dollars a year that they now spend on traditional mortgage insurance.

Most homebuyers who can't come up with a 20 percent down payment are charged for mortgage insurance. The insurance protects the lender -- or the ultimate purchaser of the loan, such as Freddie Mac -- from losses caused by borrower defaults or foreclosures. Typical premiums of $40 to $75 get tacked onto borrowers' monthly mortgage escrow payments.

Mortgage insurance is big business: Roughly 5 million homeowners pay premiums annually on $546 billion worth of home real estate. But Freddie Mac believes the cost of mortgage insurance is too high. If the big two mortgage investors -- Freddie Mac and Fannie Mae -- were allowed to use alternative forms of default risk coverage on the 15 million insured loans they currently own, according to internal Freddie Mac estimates, more than 4 million households would save $1.4 billion in premium payments every year.

Even by what Freddie Mac considers conservative projections, the average Freddie Mac homebuyer now paying mortgage insurance would save $324 a year using the alternative loss-protection plan Freddie would like to initiate.

Who are these homebuyers? According to Freddie Mac estimates, 60 percent of them are moderate-income, first-time purchasers. More than 670,000 of them are minority households, including nearly 185,000 African-American and 200,000 Hispanic families.

Peter Zorn, Freddie's director of financial strategy and policy analysis, says traditional mortgage insurance is overpriced, and is particularly costly to lower-income minorities and other households.

Freddie Mac's solution: Replace at least some insurance coverage with variations of "self-insurance," whereby lenders would create loss-reserve escrow accounts funded by borrower payments. The loss reserves would be tapped only when defaults or foreclosures required a payout. Borrowers would still be paying for loss protection. But Zorn says the cost of the protection -- absent the organizational and regulatory overhead expenses passed on by insurance companies in their premium charges -- "would be substantially less."

Zorn added that although the mortgage insurance industry describes itself as highly competitive, just eight companies dominate the field nationwide, and they show relatively little price variation in premiums within each state because of regulatory "price posting" requirements.

Freddie Mac officials sought -- and obtained -- a congressional go-ahead to use alternative loss-protection mechanisms in the closing moments of debate on a housing appropriations bill. But lobbyists for the mortgage insurance industry saw a threat to their business -- and substantial profits -- if one of the biggest users of insurance was allowed to dispense with it. They persuaded congressional leaders to rescind the approval to Freddie Mac, at least until hearings can be held.

A spokeswoman for the Mortgage Insurance Companies of America, the trade group for the industry, said Freddie Mac's congressional charter directs the corporation to use "third-party" insurance to avoid possible costs to the taxpayers. In a worst-case scenario, said Ellen Schweppe of the insurance trade group, Freddie Mac could suffer a $65 million loss over a five-year period if it used self-insurance instead of traditional mortgage insurance.

However, Freddie Mac's regulatory agency, the Office of Federal Housing Enterprise Oversight, has seen the details and, in a letter to Senate Banking Committee Chairman Alfonse M. D'Amato, a New York Republican, said the program would not "adversely affect the safety and soundness" of Freddie Mac.

The bottom line here? Many consumers are no fans of private DTC mortgage insurance, having watched the industry collect premiums from borrowers for years beyond economic necessity. That situation was corrected by federal reform legislation only this summer, requiring disclosure of borrower cancellation rights and automatic termination of coverage when borrowers' equity holdings reach preset levels.

Given the opportunity, a lot of consumers would probably jump at it.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

Pub Date: 10/25/98

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