Page 43 - The GSE Report March-April 2018

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To the lender, this program looks largely like discounted singles programs that have been commonplace in the market for the last few years. The main distinction is that Freddie Mac will chose the mortgage insurance counterparty (a reinsurer in this case) instead of the traditional transaction where a lender selects the mortgage insurer. The fear for the market is that this is the beginning of Freddie Mac attempting to disintermediate the mortgage insurers from the market. Freddie has stated otherwise, but the stock price reaction for mortgage insurers indicate there is ample fear.
“It’s important to note that the traditional MI structure remains an important tool for Freddie Mac and the industry to provide access to credit for qualified borrowers.”
Freddie Mac Statement to Bloomberg
Policy Point of View
Freddie Mac’s IMAGIN pilot is likely to be met with broad, coordinated opposition from key industry groups in the weeks ahead. In particular, we expect industry opposition to focus on three general themes:
• While the IMAGIN construct is not a direct foray into the primary mortgage market, it surely blurs the Congressionally-mandated line of demarcation. In this transaction, Freddie Mac is selecting insurance on a loan-level and effectively controlling pricing and coverage determinations.
• At first blush the IMAGIN pilot appears predicated – at least in part – on capital arbitrage provided by the use of offshore reinsurers. There are political and procedural concerns associated with this dynamic.
• There are substantive questions regarding the utility of this type of reinsurance structure in the broader context of GSE CRT efforts. Partnering with the largest mortgage insurer to provide additional offshore reinsurance capital, which is inherently nomadic through the cycle, appears to run contrary to the FHFA’s stated goal of disintermediating GSE counterparty risk.
Given the narrow focus of the pilot and a coming wave of industry opposition, we believe the IMAGIN pilot will simply serve as a specialized tool in the much larger CRT toolbox.
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