How does mortgage indemnity reinsurance work?
This class of business is dominated by the US, the largest global
mortgage market, where the government-sponsored enterprises
(GSEs)—Freddie Mac and Fannie Mae—are mandated by law to have
one of three credit enhancements to be in place at the time the GSEs
purchase a high loan-to-value (LTV) mortgage. A mortgage insurance
policy from a qualified insurer, as determined by the GSEs, insures
the portion of the unpaid principal balance (UPB) of the mortgage in
excess of 80 percent of the property’s value.
Mortgage indemnity reinsurance is the reinsurance of these
underlying policies. Since 2014, under mandate from the Federal
Housing Finance Agency (FHFA) to reduce US taxpayer risk, the GSEs
have been consistently transferring credit risk to the capital markets
and reinsurance market via their credit risk transfer (CRT) programmes.
The typical CRT deal structure is mezzanine, excess of loss coverage,
in which the GSEs sell in the range of 250bps to 300bps of the risk,
as measured by UPB.
Historically this coverage was provided by monoline mortgage
insurers and there was no change to the one-way counterparty
risk exposure post the financial crisis. Arch Mortgage Risk Transfer
(MRT), was an innovative step within CRT, whereby the GSE was
able to mitigate its one-way risk exposure by bringing in more highly
rated, diversified sources of capital.
MRT’s main distinction within existing forms of CRT has been
procuring reinsurance coverage from global, diversified reinsurers on
>80 percent LTV mortgages in the first loss position.
In March 2018, Arch Capital Group worked with the GSEs to
structure a new mortgage CRT programme. Freddie Mac launched
the first Arch MRT product, IMAGIN 2018-01, which placed a
highly diversified panel of reinsurers behind Freddie Mac in the first
transaction of its kind.
Fannie Mae’s programme is known as an EPMI (Enterprise
Paid Mortgage Insurance); both programmes aim to bring robust
and diverse capital to the low down-payment housing market
(>80 percent LTV).
How is it safer than the earlier iteration of mortgage risk
transfer that led to the financial crisis of a decade ago?
Understanding the answer to this question is key for markets
interested in writing mortgage risk, as it is a completely different
world now compared to pre-2008. Since the financial crisis I would
say there have been three key changes.
MORTGAGE INDEMNITY REINSURANCE
Steven Rance, managing partner–mortgage indemnity reinsurance,
and Freddie Scarratt, account executive–mortgage indemnity
reinsurance at Capsicum Re, discuss the ins and outs of the mortgage
indemnity reinsurance market with Bermuda:Re+ILS.